The FINNCIAL — Global mergers and acquisitions (M&A) prospects remain positive as 50% of companies plan transactions this year, according to EY’s 14th Global Capital Confidence Barometer (CCB), a survey of more than 1,700 executives in 45 countries.
Now in its seventh year, the CCB finds a continued appetite for buying and bonding (dealmaking and alliances) and a fiercely competitive M&A landscape in which almost a third (28%) of executives surveyed expect to see more unsolicited bids in the next 12 months. Underlining the strong focus on inorganic growth, 40% of C-suite is seeking to forge alliances with other businesses.
Pip McCrostie, EY’s Global Vice Chair – Transaction Advisory Services, says:
“Prolonged low economic growth coupled with market disruption, is generating a strong M&A appetite. Given the pressure on pricing and the pace of change, organic growth alone is often not enough. Companies are increasingly likely to do deals and form alliances to generate higher returns. Buying and bonding are now key features of the corporate growth agenda.”
Executives spread their bets and find new friends in old enemies
The CCB finds a conducive environment to sustained dealmaking over the next year. Valuations are perceived as stable and executives remain confident in the number and quality of opportunities available, as well the likelihood of closing deals.
Deal pipelines remain strong and more than 80% of those planning deals have more than one in their M&A pipeline. A quarter of executives expect deal pipelines to increase in the next year.
Companies are shifting to bigger deals with a five-fold increase in the number of firms looking to acquire assets more than US$1b. This is expected as meaningful growth requires bolder moves.
“In addition to deals, 40% of companies are considering alliances to help respond to the impact of digital transformation across their business environment,” says Mrs. McCrostie. “Alliances are increasingly being seen as a means to take advantage of the expertise of others. They provide a more informal, lower risk approach, enabling companies to respond quickly to changes to the market. Companies are able to enter and exit an alliance more easily than with a deal.”
Sector convergence – strategic reviews fuel activity
Technology and changing consumer preferences are driving sector convergence and accelerating the emergence of new competitors across many industries, and this is driving strong deal sentiment and reviews of assets. More than a third of executives (37%) expect more ‘distressed sales’ in the next year. This is in line with companies across most sectors shifting their core focus and conducting strategic reviews, often with a view to selling underperforming assets.
The sectors with the highest acquisition appetite are oil and gas (59% of companies planning a deal), consumer products and retail (59%), power and utilities (58%), diversified industrial products (55%) and life sciences (51%).
Domestic economic prospects prompt overseas investment
With economic growth remaining subdued, companies are looking to boost their prospects overseas with 74% considering cross-border M&A.
“The survey finds companies are continuing to review portfolios and assessing where they are operating,” Mrs. McCrostie says. “Executives are keen to look abroad to find bright spots of growth as they plan their investment strategies.”
M&A trade-flows see companies looking across a wide range of geographies to support their strategic goals. Western Europe is again the primary region of choice as firms look to take advantage of relatively lower valuations and cheaper financing. The prevailing trend of outbound investment from China is set to continue as Chinese companies seek intellectual property-rich assets. Chinese companies have already spent more than US$100b on overseas assets from February 2016 until April 2016 – the highest value on record. In terms of the investment destinations of choice, the US, UK, Germany, India and China are the top five countries.
Robust economic outlook supports M&A confidence
A robust economic outlook is bolstering M&A intentions – executives remain relatively untroubled by market volatility in the first quarter of 2016.
However, some concerns remain. Heightened global and regional political instability, especially in the Middle East, the Korean Peninsula and the South China Sea are perceived as the highest risks.
One potential risk to future mega-deals (US$10b+) is executive concern of regulatory and competition oversight. That has impacted recent deals as authorities become more interventionist in some large industry consolidations. Companies will need to consider how to respond to such challenges when evaluating large consolidations.
Those concerns aside, M&A confidence remains high and executives do not expect major systemic risks – evidenced by buoyant acquisition sentiments and well-stocked deal pipelines.
Mrs. McCrostie says: “While executives view the global economy as relatively stable, they need to create their own tailwinds in a prolonged low growth environment. A key challenge for executives is to maintain a strong grip on costs, while identifying new sources of revenue. Acquisitions, as well as alliances, are part of the corporate growth agenda for the foreseeable future.”
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