Growth agenda tempered by global turmoil

Monday, 10 October 2011 — Despite global economic turbulence and market turmoil, 41% of Australasian* companies expect to make an acquisition in the next 12 months, according to Ernst & Young’s latest six-monthly Capital Confidence Barometer.

Released today, the report is based on a survey of more than 1,000 executives from around the world, including 110 respondents from Australasia, undertaken in August.

Asia Pacific continues to be the number one preferred area for investment for both Australasian and global companies, with local interest jumping from 35% in April to 72% now, and global interest from 26% to 49%.

Ernst & Young’s Transaction Advisory Services Leader for Oceania, Graeme Browning, says while the 41% of Australasian companies intending to do deals in the next 12 months is down from 46% in April, it remains at a healthy level given the recent global economic turbulence.

Other indicators also point to an environment more conducive to M&A.

“Australasian respondents believe the buyer-seller price gap has narrowed, almost two thirds expect valuations to remain at current levels for 12 months and 19% believe valuations will increase,” says Browning.

“There has also been a sizeable uptick in potential sellers compared to six months ago – with 25% of businesses now planning to divest in the next year, compared to 15% in April.”

The report also shows nearly 60% of local businesses plan to maintain their current workforce and another 30% expect to create jobs in the next year. Sentiment around the domestic economies is positive, with 79% expecting it to be stable or improve.

“Australasian companies are well capitalised and coming off the back of a positive reporting season, 51% of local respondents are focused on growth in the next 12 months,” says Browning.

However, Browning says global economic and market woes are weighing on the confidence of Australasian businesses, driving a cautious approach.

“Global market volatility and economic uncertainty in recent months appear to have unnerved Australasian companies, despite our sound local economic fundamentals,” he says.

The report shows that 30% of Australasian respondents are now primarily focused on preserving capital, up from just 8% six months ago. This is significantly above the global result of 19%.

Similarly, Australasian sentiment around global economic growth is also significantly different to the global view, with only 14% feeling positive, compared to 44% of global respondents.

Browning says the focus on preserving capital means that Australasian companies will be well positioned to take advantage of transaction opportunities as they arise.

“Even in these challenging economic conditions, there are M&A opportunities, particularly for those who are rigorous in evaluating risk and astute in assessing cross border investment opportunities,” he says.

“However, low confidence levels may mean that many are too slow to act or may not transact at all. Those who stand on the sidelines risk handing the advantage to competitors.“

“Market volatility appears here to stay for a while yet, and businesses must get used to this dynamic.”

“It will be the fittest and fastest corporates that will maximise the opportunities that arise in uncertain times.”

Key findings (Australasia)

Economic outlook

Local respondents are more pessimistic about the global economic outlook, with 51% believing the global economy will decline. This compares to 59% of global respondents who believe the global economy is stable or improving on the back of buoyant Asia Pacific markets.
79% believe the Australasian economies will be stable or improve
Nearly 60% plan to maintain their current workforce and another 30% expect to create jobs.

Capital focus

25% are focused on organic growth, down from 32% in April
15% are focused on capital raising, up from 11%
30% are focused on capital preservation, up from 8%

Growth outlook

51% are focused on growth, up from 49% in April
42% are focused on maintaining stability, up from 33%
7% are focused on survival, down from 18% and the lowest level since the survey began in 2009
28% say banking/financial regulation reform poses a risk to growth in the next 12 months
26% say environmental regulation poses a risk to growth in the next 12 months
18% say tax regulation poses a risk to growth in the next 12 months

Capital raising & financing

Equity raising has more than halved as the likely primary source of deal financing in the next 12 months (11%, down from 27%), while debt has jumped from 3% to 32%. However 28% of local executives report that less than 10% of acquisition funding in the next 12 months will be in the form of debt.
23% need to re-finance in the next 12 months, up from 17%in April

M&A outlook

41% plan to pursue acquisitions in the next 12 months, down from 46% in April
Asia Pacific is the top region for investment for both Australasian (72%) and global (49%) respondents
Australasian interest in Asia Pacific has jumped from 35% in April to 72% now
The top four investment destinations for Australasian acquisitions are China, India, Malaysia and Singapore
25% intend to make divestments in the next 12 months, up from 15% in April

* Australia and New Zealand

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Contact details

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