- 35% of executives planning acquisitions up from 25% a year ago – mature markets to lead revival, confidence rising in emerging markets
- Improving M&A sentiments reflect finite growth opportunities offered by organic measures
- Economic confidence at two-year high; credit and cash available for deals
- Clear intent to do larger, momentum-creating deals
Almost 70% of global executives expect deal volumes and deal sizes to improve over the next 12 months, according to EY’s ninth bi-annual Capital confidence barometer, a survey of 1,600 senior executives in more than 70 countries. With core fundamentals in place to support M&A, over a third (35%) of companies will pursue acquisitions in the next 12 months compared to 25% a year ago.
More positive sentiments around deal-making stem from a growing economic confidence which has risen dramatically over the last 12 months — 65% expect the global economy to improve, compared to just 22% a year ago. Those who see the economy declining fell to 11% – its lowest level in two years. Growth is now a global imperative as almost 60% of companies say they plan to accelerate their growth strategies over the next 12 months.
“Company executives are still focused on reducing costs whilst also aiming for growth,” said Samantha Keen, Restructuring Partner at EY. “Businesses are continuing to focus on streamlining their operations and reducing cost in order to preserve and enhance their underlying profitability. This is usually driven by one or more of three factors: firstly, a desire to focus on core assets and business lines; secondly, to release trapped cash and to enhance shareholder value and thirdly, to dispose of underperforming businesses.
“Where companies are looking for divestment opportunities, it’s important that the exit is planned in advance, not overlooking the importance of reviewing legal entity structures to identify and remove inactive and surplus entities which will absorb value. This will make the business more attractive in the marketplace and more efficient to sell, as buyers will not need to factor in the additional risk and cost of dealing with extraneous entities. It is in these areas that EY’s restructuring expertise can be invaluable by increasing the chances of success and maximizing value on disposal.”
Pip McCrostie, EY’s Global Vice-Chair, Transaction Advisory Services, says: “M&A sentiments are being buoyed by a much more positive view of deal fundamentals – there have been notable increases in the number and quality of acquisition opportunities, as well as a significant improvement in the likelihood of successfully closing deals. All of this is underpinned by growing confidence in a global economy on a sounder footing – improving economic conditions in mature economies and more stabilization in the major emerging markets.”
Executives who expressed the intent to engage in momentum-creating deals (US$501m to US$1b range) more than doubled from six months ago, to 19%. Those focused on smaller transactions (< US$51m) fell to just 27%, from almost 40% 12 months ago, with greater confidence fueling an appetite to do larger deals.
Cash is less of a deal as debt and equity primed to support M&A
A shift towards using debt and equity to finance deals away from cash represents a move away from risk aversion and smaller transactions.
Says McCrostie: “Historically, larger M&A has not been typically cash-funded and the disciplined use of leverage ensures companies are able to access the credit markets as they undertake larger transactions. The use of more leverage also highlights the appetite for larger deals, to address growth mandates, and further signals a trend towards more active M&A and bigger deals.”
Mature markets to drive revival of M&A; emerging market interest grows further
A clear focus on investing into mature markets has returned with 58% of leading corporates allocating meaningful investment capital to developed markets to pursue attractive safe growth options. Economies such as the US, China, Japan, UK, Germany and France are expected to be among potential buyers and mature markets such as the US, Canada, UK and Germany are also among the destinations of investment choice.
Simultaneously, over the past 12 months, 47% of the executives indicate they have placed greater focus on investing in BRIC (27%) and non-BRIC (20%) emerging markets as they search for new strategic opportunities.
Mrs McCrostie continues: “Over the next 12 months companies will allocate their investment capital across a broad base of destinations. Companies are once again allocating substantial acquisition capital to developed markets and these mature economies will likely lead the return of M&A. However, companies will also continue to pursue the emerging and frontier markets as growth mandates take hold.
“Ultimately, investment capital will flow to those regions which provide the best balance of risk-reward opportunities.”
The top 5 destinations for would-be deal-makers are: China, India, Brazil, United States and Canada. Sectors with the highest level of anticipated deal-making are Life Sciences, Oil & Gas, Automotive, Consumer Products, Automotive and Technology.
A shift to robust deal-making as investing tops capital agenda
Over the past 12 months the focus of leading corporates’ capital agenda has shifted – the appetite to invest has increased by more than a third, while the intention to preserve capital has halved.
McCrostie concludes: “Companies have weathered a prolonged period of uncertainty during which time they strengthened their balance sheets and optimized their capital structures. Having warehoused cash for a number of years, and with ready access to credit, leading corporates are in a strong financial position to do deals – they now have more confidence to pull the trigger.
“This does not mean we will see a return to boom-time deal-making. That was unsustainable – but so is the M&A recession we have experienced since 2009. For many, organic measures alone can no longer meet growth mandates and deals will be the best route to meaningful growth. Barring any further significant economic or geo-political shocks, we should see the resuscitation of a global M&A market which has flat-lined in recent years.”