Brexit – M&A Potential Across the Irish Sea
While Brexit creates widespread uncertainty for business, M&A opportunities for Irish companies in the UK can reduce currency exposure and provide a route for international expansion at a reduced cost, writes John Fogarty, Managing Director of AIB Corporate Finance.
The fall-out from the UK’s referendum on EU membership has created significant uncertainty for Irish businesses trading with the UK. Currency volatility, potential trade agreements, tariffs, duties and uncertainty in relation to the free movement of goods and people between Ireland and the UK are key considerations for Irish businesses with significant exposure to the UK market. In particular, the depreciation of sterling poses long-term challenges for Irish exporters whose revenues are sterling denominated but costs are euro denominated.
Amongst this cloud of uncertainty, opportunities exist for Irish companies. A UK acquisition can reduce currency exposure and provide a route for international expansion at a reduced cost.
Some of the key considerations for companies contemplating a strategic move into the UK include:
1. Acquisition – A Natural Hedge
The weakness in sterling creates an environment for companies to explore how most effectively they can hedge their currency exposure when supplying UK companies. AIB’s Chief Economist, Oliver Mangan, predicts that the euro-sterling exchange rate will remain volatile for the coming two-three years as the complex process of Brexit negotiations unfold.
For Irish companies with a large UK client base, exploring acquisition opportunities in the UK is a natural consideration when developing a solution to this currency exposure.
For UK companies seeking to position themselves ahead of the outcome of Brexit negotiations, acquiring an Irish company may provide a platform to facilitate continued access to EU markets or serve as a means of acquiring a new route to market or expansion of its customer base.
Other options which merit consideration alongside an acquisition-led growth strategy include mergers and joint ventures.
2. Expansion of Client Base at a Lower Price
UK acquisitions are currently significantly cheaper for euro-based investors following the depreciation of sterling post the 24th June vote. This is an important incentive for Irish corporates currently serving UK clients and for those with aspirations to enter the UK market.
An acquisition offers not only a hedge but also scope to acquire new customer relationships at a significantly faster pace than an organic growth strategy. In a post-Brexit environment, the UK will remain a significant economy in a European context. Therefore leveraging the opportunity to widen the customer base is an important strategic consideration in the current environment.
3. UK M&A Volumes and Valuations
The uncertainty posed by Brexit has affected the volume of M&A activity in the UK. A recent study1 indicates that 495 transactions were announced in July 2016, a 5.5% drop on June and nearly a third lower than the same period in 2015. Despite the decline, these numbers clearly indicate that the UK remains open for M&A transactions.
4. Exploring Acquisition Opportunities
While the strategy adopted when exploring an acquisition opportunity is tailored to the specifics of each transaction, the core stages involved include:
- Target Identification & Evaluation
- Approach & Preliminary Offer
- Due Diligence
- Final Negotiation
- Post-Acquisition Integration
Each of these work streams comprises a series of fundamental steps, which must be explored so that a structured and thorough evaluation of the opportunity can be undertaken. This will ensure management’s decision-making is based on an informed understanding of the merits of a particular opportunity.
Whether you are an Irish company considering a UK acquisition or a UK company seeking a strategic partner in Ireland, AIB Corporate Finance has the depth of experience and relationships across both countries to assist you on this journey.
For a confidential discussion on how AIB Corporate Finance can assist your company in exploring alternative growth strategies and funding options, please contact:
AIB Corporate Finance
Tel: +353 1 641 4481
- AIB Corporate Finance Website
- For further information on Brexit and for general market commentary, please visit our FX Centre website
- Subscribe to AIB's SME Newsletter
AIB Corporate Finance Limited is regulated by the Central Bank of Ireland.
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