Monetary policy continues to impact M&A activity in the UK
In 2023, the UK experienced its biggest slowdown in M&A activity in recent years, with a year-on-year decline of 17%, a more substantial drop than the global average, which sat at 6%. Principal factors responsible for the decline included acute inflationary pains in the UK, the highest out of advanced G7 economies, and economic mismanagement from the government. Such examples include Liz Truss’s mini-budget and significant effects to energy security as a result of Russia’s war in Ukraine, highlighting the damaging effects of poor monetary policy on M&A activity.
Simon Heath, managing partner at Heligan Group states, “Despite the events of 2023, the UK has weathered some of the largest storms to date, with CPI inflation falling back to the Bank of England’s (“BoE”) target of 2%, energy security returning, and the incumbent Conservative government, which had been in power for 14 years, being ousted in the 2024 general election. With Sir Keir Starmer as the new prime minister, the Labour Party replaced the Conservative government and markets have reacted positively as a result of perceived political stability of the UK.”
As a consequence of the improving macroeconomic indicators, the BoE recently made their first interest rate cut, from 5.25% to 5.00%, and are expected to continue to cut rates, albeit not as quickly as they were hiked and ultimately not expected to fall back to the sub-1% levels experienced following the 2008 global financial crisis.
“The BoE’s rate cut and future anticipated cuts should support more favourable M&A conditions. The effects can already be seen quantitatively, with the London Stock Exchange reporting that ‘blockbuster’ M&A deals more than doubled in Q1 of 2024”, added. “The market is reacting to the easing concerns around funding costs, inflation, and political uncertainty. These indicators and expectations around further rate cuts signal that the UK is likely on a trajectory for high deal volume in the remaining months of the year and going into 2025”
When compared to European peers, the UK has experienced the highest increase in deal volume and constituted the majority of M&A transactions in the region at the time of writing. Conversely, France (-25%) and Germany (-32%) have lower aggregate deal volume compared to 2023.
Simon Heath continued: “The National Institute of Economic and Social Research (“NIESR”) has forecast that interest rates will edge down slowly to 4.60% in 2025 and to 4.10% in 2026. A prolonged period of elevated M&A is expected going forwards, save for any major unforeseen black swan events, due to the lower levels of M&A activity over the past eighteen months having created pent-up demand and supply in deal opportunities.
“Interest rates are a key macroeconomic factor influencing M&A activity. While economists are optimistic, we would advise investors to proceed with caution, given that the UK has only recently returned to stability and considering the state of the leading global geopolitical and economic indicators. Looking ahead, the other key factor to influence M&A activity will be the October Budget and any potential changes to Capital Gains Tax (“CGT”). If a material and immediate increase in CGT is introduced, it is likely to have a significant dampening effect on deal volumes given it is a transaction tax”, concluded Simon Heath.
