U.K. M&A volumes plummeted by a third during Q3 after the quietest quarter for deal activity since 2012, according to the latest figures from Mergermarket.

The total number of U.K. deals fell 32 percent on Q2, dropping from 405 to 272, and 37 percent on Q3 last year, when there were 429 M&A deals.

At the same time, the combined value of those U.K. deals dropped by two-thirds on Q2, down 66 percent from $104.8 billion (£80.7 billion) to just $35.5 billion (£27.3 billion).

However, the steep drop comes after Q2 saw the highest total value of U.K. M&A since 2015. For the year to date, total U.K. deal values now stand at $200.8 billion (£154.6 billion), the best Q1-Q3 figure since 2015.

London M&A partners cited continued market uncertainty around Brexit as a key factor behind the Q3 slowdown, as well as a lack of U.K. assets considered desirable by international investors.

Guy Norman

“Global M&A goes in cycles, and the real question is whether we are seeing the beginning of a downturn or just a temporary pause,” said Clifford Chance global corporate head Guy Norman. “Uncertainties around the wilder geopolitical landscape, as well as Brexit closer to home, appear to be growing. It may simply be a pause for breath, but it feels like it may be the start of a more prolonged softening in the market.”

DLA Piper global M&A co-head Jon Kenworthy also saw uncertainty as the cause of the downturn.

“In the immediate aftermath of the Brexit vote, most potential buyers quickly reached the view that any certainty around the terms of Brexit was so far away that they couldn’t wait and they just decided to get on with it,” he said. “The closer we get to the end of March without clarity, the easier it is for people to say, ‘I’m just going to wait a little while and see how this plays out.’ If you look towards Q1 2019, that lack of clarity could become a real overhang in the market.”

On a global basis, deal values fell by 40 percent between the second and third quarters of the year against a 26 percent fall in global deal volumes.

Global deal values dropped from Q2′s total of $1.09 trillion (£837 billion) to $649 billion (£498 billion), the lowest total quarterly value since Q1 2016, while the Q3 global deal volume figure of 3,634 is the lowest quarterly result since Q2 2013.

While Q2 saw a brief spike in deal values, the underlying volumes suggest that a long-predicted market slowdown is now beginning to take hold.

“There is a lot of heat and excitement surrounding mega-deals, but it’s important to note that volumes are down and the big-dollar deals are masking the underlying reality that deal flows are lower. The apparent M&A boom is largely a product of a number of mega-deals rather than an improved market overall,” Norman said.

“Regulatory restrictions are a challenge—people are increasingly wary of the antitrust and political obstacles their transactions may face and are investing more time up front to assess possible hurdles and mitigation strategies,” he added. “Deals which appear high risk in this context can often be abandoned before they begin.”

Bob Bishop

DLA Piper global co-chair of corporate Bob Bishop said he is expecting a drop in activity while the market waits to see what form Brexit will take, and who the winners and losers might be. “If you’re dependent on labor or imports from the EU, things could well get harder,” he said. “If you’re on the other side of the equation, benefiting from significant overseas business, further pressure on sterling could be beneficial.”

Of the top-performing firms for global M&A for Q1-Q3, Freshfields Bruckhaus Deringer is the only U.K. firm in the top five by value, placing second only to Davis Polk & Wardwell, which advised on 99 deals worth a total of $360 billion (£277 billion) during the first nine months of the year.

Freshfields, which moved up to second place from eighth last year, worked on 154 global deals with a combined value of $353 billion (£271 billion), with Latham & Watkins, Skadden, Arps, Slate, Meagher & Flom and Cleary Gottlieb Steen & Hamilton rounding out the top five. Linklaters ranked seventh, with roles on 137 deals worth a total of $295 billion (£226 billion).

Kirkland & Ellis, meanwhile, bumped DLA Piper off its traditional top spot for global deal volumes after advising on 416 deals during Q1-Q3. The U.S. firm placed 15th in the value rankings, down from second place this time last year.

Magic Circle firms dominated the top five spots in terms of deal value for Europe and the U.K. Freshfields topped both rankings after advising on deals worth a total of $307 billion (£236 billion) in Europe and $132 billion (£102 billion) in the U.K. Linklaters placed second in the Europe rankings, followed by Davis Polk, while Slaughter and May came in at fourth and Clifford Chance in fifth.

Herbert Smith Freehills was second behind Freshfields in the U.K. rankings, advising on deals worth a total of $114.2.billion (£87.9 billion), followed by Slaughters, Clifford Chance and Linklaters.

Major recent mandates for Herbert Smith have included advising Sky on the £26 billion ($33.85 billion) takeover offer from Comcast, the competing bid from 21st Century Fox and potential “chain principle” bid by Disney, as well as a role for the Weir Group on its $1.3 billion acquisition of ESCO Corp.

Key mandates for Clifford Chance and Slaughters & May during Q3 included the $5.6 billion (£4.3 billion) purchase of U.K. insurance broker Jardine Lloyd Thompson Group by U.S. competitor Marsh & McLennan Cos. and the sale of coffee chain Costa to global drinks producer Coca-Cola for £3.9 billion ($5.08 billion).

DLA Piper worked on the largest number of European deals at 242, while runner-up CMS worked on the most UK deals at 92.

DLA’s Bishop sounded a more positive note for the future.

“Despite the headwinds, momentum for M&A is still supported by a number of drivers, including the need for consolidation in multiple sectors and an increasing appetite among many of our clients in acquiring technology and data-driven assets which are challenging to develop organically,” he said. “This relatively recent phenomenon will be one of the factors supporting M&A activity in the short to medium term.”