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The Capital Agenda - EY - Australia

Australasian Capital Confidence Barometer, October 2012

The Capital Agenda

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Do you expect your company to pursue acquisitions in the next 12 months? (Yes)

Which countries are you likely to invest throughout Asia Pacific?

Which countries are you likely to invest throughout Asia Pacific?

How do you think the Boardroom agenda at your company has changed since the onset of the financial crisis?

Is your company likely to make an asset sale/divestment in the next 12 months?

What are the main drivers of your company's planned divestment activity? (Select two)

Which statement best describes your organisation's focus over the next 12 months?

If your company has excess cash to deploy, which of the following will be your focus over the next 12 months?

Understanding your capital agenda – key highlights

Intra-Asia-Pacific cross border activity as well as inter Asia-Pacific cross border activity is increasingly perceived as a barometer for the global community’s economic health.

In the 6th global survey, we found economic outlook, optimism, business health and willingness to divest or engage in M&A activity varied by market cross Asia-Pacific.

Which markets are likely to pursue acquisitions in the next 12 months?

Singapore Indonesia Malaysia Mainland China South Korea Australasia
58% are likely 35% are likely 50% are likely 22% are likely 4% are likely 32% are likely



Intra-Asia-Pacific cross border activity as well as inter Asia-Pacific cross border activity is increasingly perceived as a barometer for the global community’s economic health.

In the 6th global survey, we found economic outlook, optimism, business health and willingness to divest or engage in M&A activity varied by market cross Asia-Pacific.

Which markets are likely to make asset sales or divestments in the next 12 months?

Singapore Indonesia Malaysia Mainland China South Korea Australasia
33% are likely 43% ar likely 35% are likely 9% are likely 12% are likely 23% are likely





Having a clear vision around long term growth objectives and how you will achieve them will be vital. For many, this will involve looking beyond cost reduction and optimisation strategies, seeking opportunities to gain a competitive advantage, outmanoeuvre rivals and break away from the pack.

A strong Capital Agenda needs to be at the heart of all strategic boardroom and management decisions. The findings of our Capital Confidence Barometer provide useful insights into the ways companies are optimising, investing, preserving and raising capital.

Global firms move in, Australasia in a holding pattern

M&A requires confidence in the medium-term outlook, and as uncertainty remains, acquisition activity was expected to be modest. Australasian respondents are less likely to pursue acquisitions, with anticipated deals dropping from 32% to 20%, and from 31% to 25% globally.

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.

Acquisition activity is most likely to occur at the smaller to mid levels of the market, with 84% of both Australasian and 81% of global respondents saying their anticipated deal size was expected to be less than US$500m.

Echoing this trend was the increase in the number of Australasian organisations with less than US $500m annual global revenues saying that they were confident in the number of deal opportunities (40%), compared to Australasian organisations with US$10bn-501m annual global revenues (25%).

These findings are aligned to what we are seeing in the market. There have been a number of strategic consolidations taking place, especially between organisations in the small-mid market range in the diversified industrial products and resources sectors.

The main driver of these transactions is the need to bolster balance sheets, consolidate supply channels and diversify customer base. Organisations can also achieve economies of scale through M&A which can then be used to reduce costs and to expand scale and reach.

The IPO market in New Zealand is a standout, with the value of New Zealand IPOs for the last quarter of 2011 exceeding that of Europe. There is currently a healthy appetite for New Zealand assets and we expect to see significantly enhanced capital markets in the region as a result of plans to partially privatise state-owned organisations.

In Australia, inorganic growth through acquisitions, alliances, and joint ventures; and raising capital though equity and debt by preparing for an IPO or M&A; continues to be a lower priority.However, capital levels are growing among investors, and when the window opens, it will be important for organisations to be prepared as there is likely to be a build up of demand across the board.

Waiting on the sidelines

There is a growing trend among Australasian organisations to take a ‘wait and see’ approach – and this is of some concern. As global firms move on opportunistic deals, Australasian organisations continue to wait on the sidelines. This could impact our long term ability to compete on the international playing field.

As expected, low confidence in the business environment was the number one reason given for Australasian respondents not pursuing acquisitions in the next 12 months, unlike our global counterparts who say the valuation gap is the biggest hurdle.

In tougher economic times many organisations have a tendency to retreat from market activity. Some make the mistake of focusing solely on meeting short terms objectives, taking relatively ‘safer’ actions, such as reducing costs and implementing optimising strategies.

In this economic climate, organisations should continue to focus on what makes any business great - superior cash flow and sustainable growth over the medium to longer term.



Optimising – the need for innovative growth strategies

Despite the fiscal discipline most organisations have already imposed, overhead costs are still targets for even greater savings.

Efficiency and cost control is at the top of the boardroom agenda with 71% of global and 78% of Australasian respondents saying it receives increased focus since the onset of the financial crisis.

Boardroom priorities are transforming operational procedures, with 34% of global and Australasian respondents saying that cost reduction was the number one measure implemented to mitigate risks presented by the Eurozone crisis.

These trends suggest that organisations are mainly looking inwardly to reduce overheads in order to improve margins and meet targets. This approach is unsustainable and can also have long term impacts on efficiency and productivity.

There is no doubt that current operating conditions are challenging with rapidly shifting economic and political factors. While prudence is required, an overly cautious approach may be a bigger risk for some organisations.

Those who will be successful in outmanoeuvring rivals and breaking away from the pack will usually be prepared to act when others are not. Being on the front foot, keeping an eye on the market and being able to move quickly (whether you are looking to buy, sell, reorganise or restructure) can create a competitive advantage.

Raising - excess baggage

At the onset of the Eurozone crisis we saw a flurry of organisations renegotiating funding agreements. As a result, we expected the proportion of respondents intending to refinance this barometer to decline. This prediction was accurate with only 20% of Australasian and 26% of Global respondents looking to refinance debt obligations in the next 12 months.

For those who do intend to refinance in the next 12 months, the primary purpose given was to optimise capital structure, retire maturing debt or extend maturity. This aligns with the focus on optimising, not investing, capital and a generally conservative outlook.

Agility is key

Pressure from shareholders for organisations to focus on core competencies, and retrieve cash is reflected in this barometer. Australasian respondents intending to make divestments said the main drivers were enhancing shareholder value (39%), focusing on core assets (35%) and shedding underperforming business units (26%).

However, intention to divest decreased significantly both globally (31% to 19%) and in Australasia (22% to 17%).

There is a significant opportunity for organisations with diversified portfolios to divest non-core assets, targeting organisations in sectors that are best placed to achieve operational synergies, drive growth and improve performance.



Raising capital

For some, the decline in planned divestment may be a result of not achieving anticipated outcomes for previously sold assets. For transactions completed recently, 23% of Australasian respondents said that poor execution of integration was the most significant issues that contributed to deals not meeting expectations, 17% said sale price deterioration, 17% said sales volume decline and a further 13% said overestimation of strategic price.

Preserving – bunkered down

The number of respondents looking to preserve capital remains relatively constant, with 14% of Australasian respondents saying it is top of mind this barometer. This is on par with six months ago but is significantly down on the 27% of respondents a year ago at the onset of the Eurozone crisis.

Maintaining stability is the main focus for 32% of Australasian respondents, consistent with the broader themes of cost reduction and capital optimisation. The number of Australasian respondents in survival mode remains low at 4% now compared to 3% in April 2012.

However, it’s likely this will increase in the next 6-12 months as many organisations exposed to the impacts of the high Australian dollar or declining commodity prices, including those in the retail, mining services, construction and property sectors, are likely continue to experience challenging times.



In a holding pattern

It will be key for organisations to have an effective strategy for capital, rather than taking a “wait and see” approach.

The number of Australasian respondents who will use excess cash in the next 12 months to pay down debt has increased from 21% last year to 29% now, while those who will use it to pay dividends has increased from 8% to 14% reflecting pressure from shareholders.

Funding organic growth remains the highest use of excess cash at 35%, but has dropped dramatically from 51% in April.

Aligned with aforementioned findings, the ongoing uncertainties have given rise to a lack confidence and many respondents are reluctant to back themselves. Only 20% of Australasian respondents are looking to take advantage of opportunistic M&A and only 14% seeking to divest non-core assets.






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