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Brexit hands M&A baton to Germany but hurdles await

German M&A market could profit from lack of investment in UK

As the consequences of the impact of Brexit on M&A are still being assessed by European dealmakers, one country which could benefit from the uncertainty surrounding the UK is Germany.

Inbound transactions on the rise

German inbound M&A has already seen a big increase year-to-date while UK inbound M&A has decreased. In the first half of the year, there were 73 inbound deals worth $14.8bn in Germany, up over 50% by value compared to the same period last year. Meanwhile, there were 184 inbound deals in the UK worth $25.8bn, down 60% by value, according to Mergermarket data.

"M&A activity in the German-speaking region could profit from this decision," Christian von Sydow, Partner at law firm McDermott Will & Emery said. "There will inevitably be an initial dip in deals and markets will stutter, but M&A is unlikely to stand still in the medium term."

"Uncertainty and very volatile markets will prevail in the short term, closing the window for any ECM transaction pre-summer," Oliver Diehl, Head of Equity Capital Markets at Berenberg said.

Diehl continues: "However, the situation may change quickly as equity investors have a historically high cash position and may regain confidence following the Q2 reporting season, especially for businesses and sectors that are not exposed to macro uncertainties."

Expectations are that foreign direct investment across Europe will not cease but that investments into the UK could be redirected into the continent.

"Many European funds already announced before the Brexit vote that they would avoid investing in the UK," according to Jan Schinkoeth, Partner at DLA Piper. "If private equity houses and hedge funds hold back from investing both in the UK and across Europe, there will be significantly fewer deals overall in 2016."

Whilst there is still plenty of liquidity in the market, the pipeline for deals is likely to narrow as there is no immediate pressure for deals to happen and firms will wait for macroeconomic conditions to improve. 

Frankfurt's rise to prominence

Bankers and lawyers expect Germany’s financial capital Frankfurt is set to benefit from Britain’s decision to exit the European Union.

Many expect the city's presence on the world stage grow with the housing market likely to rise in the surrounding areas. They also believe that London property investors are already considering whether it may be wiser to invest in Frankfurt now.

Frankfurt is currently ranked the third most likely financial centre set to benefit from Brexit behind New York and Dublin, according to a survey by Boston Consulting Group (BCG). In order to improve its stance it needs to focus on alleviating alleged language barriers and taking advantage of its comparatively cheap housing situation to appeal to a wider international audience.

"Two-thirds of financial companies do not have any specific plans for a possible relocation following the referendum. Most expect a shift to happen within the next two years," BCG bank specialist Wolfgang Doerner, Senior Partner and Frankfurt Bureau Chief said.

Until it becomes increasingly difficult for US financial services firms to access the European market through the UK, the bankers and lawyers of Frankfurt will be left waiting in the wings.

Emma-Victoria Farr Financial Reporter Mergermarket

Emma-Victoria reports on M&A activity in the DACH region for Mergermarket. Previously she has worked for Bloomberg in Frankfurt, The Daily Telegraph in London, Deutsche Presse Agentur (dpa) in Berlin, and Falter Verlag in Vienna. She has a Masters in German Literature from Oxford University.

Emma-Victoria Farr Financial Reporter Mergermarket

Emma-Victoria reports on M&A activity in the DACH region for Mergermarket. Previously she has worked for Bloomberg in Frankfurt, The Daily Telegraph in London, Deutsche Presse Agentur (dpa) in Berlin, and Falter Verlag in Vienna. She has a Masters in German Literature from Oxford University.

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