Right ingredients for corporate M&A return

Transaction News April 2014

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The essential ingredients for a lift in M&A activity are back for Australasian corporates, the results from EY’s 10th and latest six-monthly Australasian Capital Confidence Barometer show.

The Barometer, released today, shows corporate appetite for debt is returning, confidence in corporate earnings is up and the number of companies confident about the economic outlook is at a five-year high.

The report is based on a global survey of more than 1,600 executives in 54 countries, including 136 in Australasia (Australia and New Zealand).

EY Oceania Transaction Advisory Services Leader, Graeme Browning, says the findings show the essential ingredients for a lift in M&A activity are there, and that buyers and sellers alike should be confident about being able to get deals done.

“Credit is available, corporate appetite for debt is returning and respondents expect the valuation gap to narrow – we haven’t seen all these ingredients come together in a long time,” he says.
  • The number of local corporates planning an acquisition in the next 12 months remains steady at 32%, compared to 34% six months ago and 24% a year ago
  • At the same time, 57% are confident about the number of acquisition opportunities – almost double that of 12 months ago

“Companies are now more likely to use debt to finance deals. The number of companies looking to use debt as their primary source for deal financing has more than doubled from 12 months ago. Gearing is expected to rise but to remain well within acceptable levels,” says Browning.

Disciplined optimism

However while confidence is back, companies locally and globally are retaining a focus on cost and operational efficiency.

“The prevailing attitude is one of disciplined optimism. M&A will be selective, strategic and disciplined. Companies will use M&A as a means to outperform their peers,” he says.

“For the first time since the GFC, the ingredients are there to support a robust transaction market. M&A activity has already started at the top end and this will progressively expand to mid-sized deals.”

Economic optimism reaches five-year high

“Compared with a year ago, executives are more optimistic at both the global and local level, buoyed by strengthening business fundamentals.”

  • Two thirds (66%) of Australasian executives see the local economy improving – a five-year high, up from a low of 41% in October 2012
  • 70% believe the global economy is also improving

The Barometer also shows more Australasian companies are confident across key financial indicators:

  • Corporate earnings (77% up from 46%)
  • Credit availability (71%, up from 46%)
  • Equity valuations (63% up from 25%)
  • Short-term market stability (61%, up from 20%)

Deal metrics improving, larger deals expected

Confidence in specific deal metrics has grown strongly in the past six months with more respondents confident in the number of acquisition opportunities (57% up from 31%); the quality of acquisition opportunities (37% up from 27%); and the likelihood of closing acquisitions (31% up from 20%).

Deals are also expected to get bigger

About a quarter (26%) of respondents now expect deal size in the next 12 months to be greater than US$500m, more than twice as many as six months ago (12%) and three times as many as a year ago (8%).

Globally it is a similar story, with companies intending to do fewer, but bigger deals.

  • The number intending to make acquisitions remains steady at 31%
  • However the appetite for larger transactions (more than US$500m) has more than doubled in the past 12 months from 12% to 27%

Australasian investment focus close to home

The preferred overseas investment destinations for local companies are all close to home – with China and India and their growing middle-income populations the top two, followed by near neighbours Malaysia, Singapore and Thailand.

For global companies, China and India also featured in the top five investment destinations, with the US, UK and Germany rounding out the list.

“Despite commentary suggesting Australasian companies are avoiding doing business in Asia, just over half of our respondents say they have already made acquisitions in the region or are planning to do so,” says Browning.

Key findings in Australasia

32% expect to pursue an acquisition in the next 12 months, compared to 34% six months ago and 24% a year ago
66% believe the local economy is improving and 70% believe the global economy is improving, a five-year high
77% are confident in corporate earnings, compared to 46% six months ago
71% are confident in credit availability, compared to 46% six months ago
63% are confident about equity valuations, compared to 25% six months ago
61% are confident in short-term market stability
32% expect their debt-to-capital ratios to increase over the next 12 months
45% expect to use debt as their primary source of deal financing in the next 12 months, up from 35% six months ago and 22% a year ago
54% are focused on growth, compared to the post-election high of 70% six months and 51% a year ago

Read the full survey results here