The FINANCIAL — At a time of geopolitical uncertainty and rapid change, global mergers and acquisition (M&A) prospects remain very bullish, according to the EY 15th Global Capital Confidence Barometer (CCB), a survey of more than 1,700 executives in 45 countries.
More than half (57%) of companies expect to actively pursue deals in the next 12 months — the second highest percentage recorded in the Barometer’s seven year history. More than 90% of executives expect the M&A market to improve or remain stable over the next year and less than 10% expect their own deal pipelines to contract over the same period.
In addition, joint ventures, alliances and other forms of minority investment are expected to supplement acquisitions and drive incremental growth.
Steve Krouskos, EY Global Vice Chair — Transaction Advisory Services, says:
“Everything is changing for global companies, except the expectations of their stakeholders around growth and returns — profitable growth is a mainstay demand of business. But turbo-charged technological advances and an unsettled geopolitical landscape have changed the M&A field of play forever. In this disruptive environment, the quickest route to innovation and growth is MA&A — mergers, acquisitions and alliances.”
Smaller targeted M&A on a new type of deal table
Megadeals remain a strategic option for firms, but the prevailing M&A trend is for smaller, smarter deals as companies cast a wider net and eye start-ups and fast-growth tech innovators. According to the Barometer, half (49%) of companies have on average more than five deals in progress and more than half are expecting to do deals between US$250m and US$1b. More than 90% of executives expect their deal pipelines to remain steady or increase over the next 12 months.
Krouskos adds: “With pipelines well-stocked, executives are opting for variety rather than plain vanilla in their deal intentions. They are screening a wider number of targets and doing more, smaller deals that extended their reach beyond traditional sector borders.”
Sector convergence continues as the industrial mash-up comes to the fore
Sector blurring and industrial mash-ups are an increasingly important part of the M&A landscape as companies make deeper inroads into adjacent or unrelated industries.
Findings showed companies’ most cited factor for cross-sector acquisition is reacting to competition (19%), followed by a desire to gain new customers (19%) and extend product offerings and services (19%).
“Industrial mash-ups — through acquisitions and alliances — are being driven by new market entrants upsetting the status quo. These disruptors are changing the competitive landscape with new operating models and new ways of creating demand,” says Krouskos.
Sectors with highest acquisition appetite are consumer products and retail (71% of companies planning a deal), diversified industrial products (60%), life sciences (56%), technology (54%), automotive (54%) and oil and gas (52%).
Geopolitical concerns and the rise of nationalism complicates cross-border investments
Geopolitical and macroeconomic issues in various forms — from currency fluctuations to declining trade flows — are an increasing concern for global executives the survey finds. This is fueling deal intentions as companies seek fast routes to growth in a low GDP environment. These issues also add complexity to international deals and for the first time in the Barometer’s seven-year history the UK is not among global executives’ top five investment destinations of choice.
“Brexit is a prominent example of the rise of geopolitical changes that are adding complexity to cross-border investments. In the longer term, we would expect the UK to bounce back as a top M&A destination of choice but the short-term uncertainty is giving investors pause for thought.”
Domestic M&A in China will be prominent in 2017 with US$160b spent of cross boarder investment so far this year.1 China will also continue to be a major outbound acquirer having already made investments in more than 50 countries in 2016. The US, China, Germany, Canada and France are the top five destinations for dealmaking.
Despite challenges, M&A set for uptick in 2017
Despite economic and geopolitical uncertainty, dealmaking intentions remain well above (57%) the Barometer’s long-term average (42%).
Krouskos says, “The current environment holds challenges for dealmakers — and some are new. As sector convergence increases, the integration of assets outside a company’s traditional core is far from straightforward. Also, a growing acceptance of a broader range of deal structures brings new complexity. Additionally, the rise of nationalist politics in a globalized business world requires new boardroom thinking around cross-border investment strategies.
“We cannot underestimate the fundamental changes in M&A. There is now an expanding menu of deal structure options. Data and analytics are enriching the reach and depth of deal evaluation. Deal integration has shifted from driving cost synergies to value creation, now starting with the customer and not the back office. Integrating dissimilar businesses creates the need for bespoke as opposed to off-the-shelf solutions.
“These factors have permanently reset the deal table. Despite the reset, the deal table will be full and we expect to see an uptick in M&A in the first half of 2017.”
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