Deals back on corporate agenda to deliver growth

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Wednesday 6 November 2013 — The number of Australian companies intending to make acquisitions has soared in the past six months, EY’s latest six-monthly Australasian Capital Confidence Barometer shows.

Released today, the report is based on a global survey of almost 1,600 executives in 72 countries, including nearly 150 in Australasia (Australia and New Zealand).

The results show 34% of Australasian companies intend to pursue an acquisition in the next 12 months, up from 24% in April this year and 20% a year ago.

Similarly, the number of companies focusing on growth has almost doubled in the past year to 70% – the highest in four years.

EY Oceania Transactions Advisory Services Leader, Graeme Browning, says: “It’s clear from this barometer that growth is back on the agenda. Confidence has been buoyed by the election of a majority government and the greater political certainty and stability that brings.”

Confidence in both the local and global economic outlook is up, with 93% expecting the local economy to grow, albeit modestly, compared with 86% six months ago.

“Over the past few years companies have squeezed earnings growth through cost savings. Now with relatively modest expectations for GDP growth, deal-making is one of the few strategies with the power to deliver earnings growth,” says Browning.

“Despite having plenty of cash and access to capital, until now local corporates have been hesitant to do deals – that seems to be changing. There is pent up demand out there.”

Nearly half the Australasian respondents expect prices to increase in the next 12 months and 38% expect the valuation gap to widen in the next 12 months.

“The buyers are there, but there are still relatively few assets for sale. That will change, but it’s likely those who move first will win on both timing and price,” says Browning.

Capital allocation moves up boardroom agenda

While efficiency and risk management remain at the top of the boardroom agenda, capital allocation is back in the spotlight. A year ago only 49% said capital allocation was getting more attention by boards, today 67% view it as a higher priority, indicating changing sentiment.

“This increasing focus on growth is also reflected in corporates’ capital agenda. After a long period of uncertainty, Boards are prepared to look at well considered transactions again. Today 57% of businesses are looking at investing capital, up from 32% a year ago,” says Browning.

“Companies are looking at innovative ways to transact – the traditional buy/sell is still there, but so too are joint ventures, demergers and refinancings. There are different ways to get things done, companies are now being more innovative.”

“We have weathered a prolonged period of uncertainty during which time companies have 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 and 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’ve experienced since 2009. Barring any further significant economic or geo-political shocks, we should see a lift in the global M&A market which has flat-lined in recent years.”

Key findings in Australasia

  • 70% say their focus is on growth, up from 51% six months ago and 37% a year ago
  • 57% say their capital agenda is focused on investing, up from 32% a year ago
  • 34% expect to pursue an acquisition in the next 12 months, up from 24% six months ago and 20% a year ago
  • 47% expect asset prices to increase in the next 12 months
  • 54% have a greater focus on emerging markets than they did a year ago, with 31% focused on non-BRIC countries including Vietnam, Thailand and Indonesia
  • 89% consider credit availability is either stable or improving

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This news release has been issued by Ernst & Young Australia, a member firm of Ernst & Young Global Limited.

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Contact details:

Megan Ball
Ernst & Young Australia
Tel: +61 2 8295 6427