What is The Potential Across the Irish Sea

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 study1indicates 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.