Australian companies taking a ‘wait and see’ approach
Tuesday 16 October — Australasian corporate are taking a “wait and see” approach to growth and a greater number intend to sit on the sidelines when it comes to M&A, the results of Ernst & Young’s latest six-monthly Capital Confidence Barometer show.
Released today, the report is based on a survey of more than 1,500 executives from around the world, including 133 respondents from Australasia*, undertaken in July, August and September.
Ernst & Young’s Transaction Advisory Services Leader for Oceania, Graeme Browning, says the results suggest companies are playing it safe, trying to squeeze more savings from efficiencies in order to protect margins.
“There’s a conservative sentiment evident. That’s understandable to some extent, however Australasian companies are relatively well capitalised and our economy remains in relatively much better shape than others,” he says.
“Despite this, Australasian companies are less likely than their global counterparts to be investing in the world’s growth markets, largely on our doorstep in Asia.”
“Companies taking this ‘wait and see’ approach need to be careful not to miss opportunities that bolder competitors are prepared to take.”
The confidence of Australasian companies in both the global and local economies has softened since the last survey in April, with 82% now believing the local economy is stable or improving, down from 91% in April. Similarly, 74% believe the global economy is stable or improving, down from 82%.
“Confidence is a fundamental ingredient for M&A, so it is no surprise that acquisition and divestment intentions have also dropped,” says Browning.
“However, what is encouraging is that most respondents expect economic growth to continue at least at current levels.”
The latest Capital Confidence Barometer shows 20% of Australasian companies intend to pursue an acquisition in the next 12 months, down from 32% in April and 35% a year ago. Similarly, 17% intend to make divestments in the next 12 months, down from 22% in April.
“For companies seeking longer term growth, sitting on the sidelines is not a sustainable strategy,” he says. “Cost control in the short term is understandable, but it is also not a growth strategy.”
Browning says while capital availability remains difficult for some smaller and mid cap companies, there are financing solutions for those with the confidence to seize opportunities.
Key findings (Australasia)
Economic outlook
- 74% believe the global economy is stable or improving, down from 82% in April 2012
- 82% believe the local economy is stable or improving, down from 91%
- 61% plan to maintain their current workforce in the next 12 months, another 21% expect to create jobs and hire talent, while 18% expect to cut employee numbers. This compares to 60%, 27% and 13% in April 2012.
Capital focus
- 31% are focused on capital optimisation, compared to 33% in April 2012
- 23% are focused on capital raising compared to 24% in April 2012
- 32% are focused on investing compared to 32% in April 2012
- 14% are focused on capital preservation, compared to 11% in April 2012
Growth outlook
- 37% are focused on growth
- 32% are focused on maintaining stability
- 27% are focused on cost reduction and operational efficiency
- 4% are focused on survival
Capital raising & financing
- 53% of Australasian respondents have debt to capital ratios of less than 25%, compared to 64% for Australasia in April and 73% for Australia in April 2012
- 57% of Australasian respondents say cash is the likely primary source of deal financing in the next 12 months, up from 49% in April, with debt now the main source for 27% (29% in April) and equity the main source for 16% (down from 22%)
- 27% of Australasian respondents say credit availability is an issue compared to 21% globally
M&A outlook
- 20% of Australasian companies plan to pursue acquisitions in the next 12 months, down from 32% in April 2012 and down from 41% in October 2011
- 17% intend to make divestments in the next 12 months, compared to 23% in April 2012 and 25% in October 2011
- 34% are positive about the number of deal opportunities in the next 12 months, 24% are positive about the quality of deal opportunities and 25% are positive about the likelihood of closing deals. This compares to 34%, 31% and 27% six months ago
- Of those who do expect to do a deal in the next 12 months, 84% anticipate doing a deal of US$500 million of less
- 33% believe the valuation gap is less than 10%, down from 19% in April 2012
- Globally, industrial products (34%), financial services (32%), oil and gas, and consumer products (both 28%) are the sectors most likely to pursue acquisitions in the next 12 months
* Australia and New Zealand
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