The authoritative source for independent research on UK-EU relations

06 Jun 2023


In light of the Competition and Markets Authority blocking Microsoft’s acquisition of Activision, this month’s trade tracker takes a deep dive into the UK’s post-Brexit mergers and acquisitions market, highlighting that a substantial increase in the market has taken place, driven by several factors and despite significant uncertainty.

On 26 April, the Competition and Markets Authority (CMA) blocked Microsoft’s $68.7bn acquisition of Activision, the video game developer responsible for the popular Call of Duty series, based on the concern that it would reinforce Microsoft’s already significant position in the cloud gaming market and undermine the growth of an emerging market.

Depending on your perspective, the decision is something to celebrate, highlighting the UK’s forward-looking consumer-focused post-Brexit regulatory stance (given the EU has approved the deal), or it is symptomatic of an unfriendly business climate, with an Activision spokesperson claiming that that ‘the UK is clearly closed for business’.

The decision highlights the CMA’s interventionist role post-Brexit, coming on top of recent examples of it stepping in to block potential market-distorting activities in the tech and digital sectors.

In 2021, the CMA presented Meta, the owner of Facebook and Instagram, with a record-breaking £50.5m fine for breaching an initial enforcement order to divest the gif creation platform Giphy, because its ownership stifles innovation in the display advertising market.

The Microsoft-Activision decision came as the government introduced the Digital Markets, Competition and Consumers Bill, which is intended to grant the CMA additional capabilities to investigate mergers and make ‘pro-competition interventions’ against companies with a significant influence in digital markets.

The greater powers for the CMA also reflect the fact that, post-Brexit, its remit has grown significantly to cover all international mergers affecting the UK. This makes it one of the most consequential competition authorities internationally, and led to fears that it may struggle with a dramatically increased caseload (though in reality it only reviews a small fraction of mergers).

There were also fears that Brexit-related uncertainty would dampen the UK’s mergers and acquisitions (M&A) market, yet the data produced by the ONS tells a rather different story. Driven by several factors, including the relative undervaluing of UK plc and the pound’s weakness, there has been a substantial boom in the UK’s M&A market.

Looking first at M&A volume, there has undoubtedly been an increase following the 2016 referendum. This reached a peak in 2021, with a total of 2,298 deals (310% higher than in 2015). Most of the activity was driven by the 1,198 domestic deals (M&A between two UK companies), accounting for 52% of the overall activity.

Another key factor was the rise in inward M&A, referring to deals in which foreign companies acquire UK businesses, which in 2021 was the highest since records began in 1987.

From 2015 to 2022, inward M&A grew by 397%, which is significantly more than the 108% growth in outward M&A (UK businesses buying foreign companies).

Volume of mergers and acquisitions in the UK market between 2012-2022.

In large part, the divergence between inward and outward M&A has been driven by the pound’s weakness, which fell dramatically after the referendum and has never recovered to pre-referendum levels.

Consequently, it became cheaper for foreign firms to acquire British businesses on the one hand and more expensive for British firms to acquire foreign companies on the other.

Turning to deal value, 2016 is clearly the standout year regarding the value of the UK’s M&A market, with a 252% increase in total M&A value compared to 2015. However, the record-breaking spend in 2016 was somewhat unusual as there were four enormous deals, including AB InBev’s (Belgium) £78.4bn acquisition of SABMiller (UK).

Since then, there has been a general shift away from high-value transactions towards more numerous mid-market deals, indicated by the decrease in total deal value, even as the number of deals rose.

Value of mergers and acquisitions in the UK market between 2012-2022

2021 bucked this trend with cross-the-board increases in the value of M&A. Again, here, the growth in inward M&A is particularly striking, with an increase of 300% compared to the previous year.

Several factors underpin the 2021 boom in M&A activity, including a rebound following 2020’s Covid-related slowdown, increased certainty in a post-Trade and Cooperation Agreement environment, and an influx of cash from private equity firms. Indeed, 2021 saw more private equity-backed deals than any other year on record.

Meanwhile, Russia’s invasion of Ukraine, which produced significant inflation and quantitative tightening in the UK, contributed to the comparative decline in 2022.

Whether looking at trends by value or volume, inward M&A in particular has clearly driven the growth in the UK M&A market since Brexit.

So, where is it coming from? Up to 2017, the volumes of inward M&A from the EU and the US were broadly equivalent. However, from 2018, the US has overtaken those from the EU, peaking in 2021 with 313 acquisitions that accounted for approximately 47% of inward M&A that year, compared to 39% in 2015 and 2016.

Volume of inward mergers and acquisitions in the UK market between 2012-2022

A 2021 survey of 68 major US companies working across sectors including financial services, tech, telecommunications, and life sciences, and employing over 275,000 people, reported strong and sustained confidence in the UK as a place to do business based on the UK’s pro-business environment, talent pool and cultural similarities.

Moreover, the US is a major private equity market, with its firms estimated to hold upwards of $1tn in funds during 2021.

One of the most prominent deals of the year was driven by private finance, as Clayton, Dubilier & Rice spent £7bn  to acquire Morrisons. The deal came in for criticism as indicative  of a wider sell off of British corporations to US private equity firms looking to asset strip. In 2022, CD&R gave the go-ahead for a £500m sell-off of part of Morrisons’ property portfolio.

A look at the data by value underlines that US firms have also been responsible for the biggest M&A since Brexit. US investment peaked in 2018 at £52.6bn, accounting for 79% of inward M&A value that year. And notwithstanding Covid-affected 2020, US firms have consistently outspent EU firms in the post-Brexit period – accounting for the vast majority of all M&A by value – despite a much more limited difference in deal volumes.

Value of inward mergers and acquisitions in the UK market between 2012-2022

The data presented above demonstrate that post-Brexit, there has been a substantial increase in the British M&A market, driven by several factors and despite significant uncertainty. Quite how 2023 will play out remains uncertain, but several analysts suggest the market is set to strengthen into the second half of 2023.

By Tom Howe, researcher, UK in a Changing Europe.


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