For the second year in a row, Stout supported students with their applied research projects in collaboration with Bayes Business School. Student Jaian Patel authored “M&A Activity Since Brexit: Correlation or Causation?”

Stout played a pivotal role in these projects by offering support and direction for the students’ applied research projects, providing valuable feedback from an industry perspective, and facilitating access to databases essential for research.

Further, Stout provided comprehensive guidance on the structure of the project throughout its drafting stages and assisted in ideation. The two students were also given the opportunity to engage in learning experiences with senior bankers during their visits to the office. The supervision for the students was provided by Sonia Falconieri, the Professor of Finance and Head of the Faculty of Finance at Bayes Business School, and Damian Sebastian Serwin, an Associate at Stout’s London Office.

A summary of the paper is provided below.

The outcome of the EU (European Union) referendum in 2016 was a highly anticipated event by markets. The widespread uncertainty and initial ambiguity regarding the U.K.’s future relationship with the EU, regulatory change, market access, and trade agreements posed large concerns, particularly for firms domiciled in the U.K. and Europe. Though the initial negative shock to deal activity is less apparent eight years later, little research has been done to examine whether Brexit has had a chronic impact on inbound and outbound deal activity in U.K. markets.

The research paper “M&A Activity Since Brexit: Correlation or Causation?” investigates the longer-term impact of Brexit on U.K. M&A, focusing on whether Brexit acted as a causal factor in altering deal volumes and values for U.K. firms compared to non-U.K. firms in the U.S., EU, and Nordics.

Using data from 2012-2023, a much larger sample range than previously studied, the research applies a quantitative approach with descriptive and empirical analyses. A difference-in-differences (DiD) approach examines deal activity for U.K. acquirors relative to foreign counterparts while controlling for macroeconomic indicators like GDP, inflation, and firm-specific variables like acquiror size and leverage.

Key findings included:

• Reduction in Outbound M&A Activity: Brexit introduced substantial uncertainty into the market, with a significant reduction in completed deals pursued by U.K. acquirors (particularly with Nordic and U.S.-based firms), likely due to increased regulatory challenges. However, when looking at total deal volumes, Brexit appeared to have no significant long-term impact on the overall number of deals between the U.K. and EU, Nordics, and U.S. While there is an observable upward general trend in deal values across the sample, Brexit had no significant effect on the total value of U.K. deals, though the average value of completed deals has continued to increase post-Brexit.

• Increased Foreign Acquisitions of U.K. Firms: While Brexit may have posed challenges for U.K. acquirors, the uncertainty and devaluation of the pound created opportunities for foreign acquirors. EU and Nordic firms, in particular, increased acquisitions of U.K. targets, capitalising on lower valuations and favourable exchange rates to retain a strategic foothold in the U.K. market.

• Resilience of Larger Firms: Firm-specific factors such as acquiror size and leverage were found to significantly impact deal volumes with larger firms more likely to engage in M&A activity. Firms with greater financial power and liquidity were more likely to engage in transactions during the post-COVID and Brexit periods to take advantage of low valuations of distressed target firms negatively impacted by prolonged uncertainty.

• Confounding Effects of COVID-19: The COVID-19 pandemic caused a large negative shock to M&A activity, followed by a surge in deal activity in the immediate recovery period. This pandemic-related volatility makes it difficult to isolate the specific impact of Brexit, particularly as the pandemic coincided with the transition period of Brexit. The presence of this overlap introduces some confounding effects, making it challenging to distinguish the chronic impact of Brexit on deal activity and attribute causality to observed trends.

While U.K. firms have undoubtedly faced heightened barriers in pursuing outbound deals, this has been offset by increased foreign acquisitions into the U.K. seeking to capitalise on strategic opportunities.

While the paper’s findings indicate some level of impact of Brexit on M&A activity, COVID and adverse macroeconomic climates make it difficult to establish true causality.