As law firms and clients wait out the legal and regulatory uncertainty after Britain’s decision to leave the European Union, another factor could complicate matters: the falling British pound.
After plummeting more than 12 percent against the dollar on Friday following news of Britain’s exit, the largest same-day dip in the currency’s modern history, the pound tumbled again on Monday to $1.32, its lowest price in three decades.
For deal lawyers, a descent far enough could set off a shopping spree in the M&A space, a best case scenario. For now though, deal activity remains frozen amid the economic uncertainty, lawyers say.
“I think we’re all trying to figure out where the bottom is,” said Doug Getter, head of Dechert LLP’s corporate practice in Europe. “We don’t know whether this is a revaluation or we’ll get stability back over time.”
Getter and other lawyers said clients have pressed pause on large transactions in the UK, and M&A activity is likely to remain stagnant while they wait for the UK and the EU to iron out Brexit details, but a falling pound could lure new buyers into the British market.
“Some people may want to see how things play out. But on the other hand, the pound is at historic lows, so if you’re a private equity shop or a company you may be able to get an asset you’ve been eyeing for a long time at a very attractive price,” said John Bick, head of Davis Polk’s corporate department.
Jeremy Parr, an Allen & Overy partner in London, echoed Bick: “Even if conditions remain volatile, if exchange rate movements or market drops are sufficiently dramatic, opportunistic moves will come from those with a strategic view and an aggressive outlook.”
How far would the pound have to fall before clients started snapping up assets? Getter suggested another 10 to 15 cents could do it: "The most aggressive banks have been calling down to $1.20. If we actually breach numbers like that, I really think people would start to question what the values are here generally.”
For now, clients are sitting tight, observers said, noting it’s unclear how long the uncertainty will last. Although British voters have called for Britain’s exit, legally the process can’t begin until the UK invokes Article 50 of the Lisbon Treaty, the agreement between EU nations which governs membership.
In a speech to the British Parliament on Monday, Prime Minister David Cameron said there are no plans to invoke Article 50 “at this stage.” Cameron, a leader of the campaign to remain in the EU, has announced he’s stepping down from office in September.
“Maybe the markets get comfortable with the unknowns, maybe it’s three to six months of uncertainty,” Bick said. "But if the political situation worsens, and negotiations between the UK and EU over withdrawal become acrimonious, you could see it stretching to a year or two.”
In the mean time, the fallout of a troubled pound will be more personal for lawyers. For those like Getter who work for U.S. firms in London, and get paid in U.S. dollars, a cheaper pound means lower costs of living. But for lawyers working for UK firms, who live abroad and get paid in pounds, life just got more expensive.
“For a British expat living in Hong Kong, being paid in pounds, it’s difficult,” Getter said.
For lawyers in London, Getter said a cheaper pound is a nice hedge against slowing M&A activity, but hardly a good tradeoff. “We’d rather be in an environment where business is booming,” he said.