Capital Confidence Barometer for CFOs

CFOs expect M&A activity to increase

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  • Introduction

    CFOs expect M&A activity to increase

    Every six months, we survey senior leaders from companies around the globe for our Capital Confidence Barometer. In September, we surveyed some 1,600 business leaders across 18 industry sectors and 62 countries. This report represents the outlook of the 582 CFOs among that group.

    EY - Tom McGrath

    Tom McGrath
    EY Americas Senior Vice Chair — Accounts

    EY - Julie Linn Teigland

    Julie Linn Teigland
    EY EMEIA Accounts Leader

    EY - Patrick Winter

    Patrick Winter
    EY APAC Deputy Area Managing Partner

    A note from EY leadership

    Welcome to the third edition of the CFO Capital Confidence Barometer. The global data shows a marked improvement in corporate confidence since our last Barometer.

    More than three quarters of CFOs (77%) are confident in corporate earnings. The number of CFOs who expect their deal pipeline to increase over the next 12 months has doubled, with the bulk of deals expected to come from the middle market.

    The proportion of executives who plan to add jobs has increased by one third. Overall, CFOs’ confidence in their business fundamentals has jumped.

    More CFOs also consider the global economy as stable than they did six months ago – increasing from 34% to 46%. However, this is tempered by the fact that fewer CFOs characterize the state of the global economy as improving – down from 57% to 50%.

    This seems largely driven by concerns regarding geopolitical instability, which CFOs cited as the greatest economic risk to their businesses. Problems such as the tensions between Russia and the Ukraine, the ongoing conflict in the Middle East and the Ebola crisis weigh on their minds.

    Some regions, however, are more optimistic than others. Finance executives in Asia-Pacific have the most bullish outlook, with North America not far behind. However, in Europe, the Middle East, India and Africa, optimism is more tempered, with a greater emphasis on stability than on growth.

    In sum, many CFOs remain optimistic about their organizations and their local markets, and as a result M&A activity over the coming year is set to increase. While economic uncertainty has certainly not gone away, our findings seem to suggest that many CFOs have learned to adapt – and are succeeding in spite of it.

    A note from Pip McCrostie

    Photo of Pip McCrostie, EY Global Vice Chair, Transaction Advisory Services

    Pip McCrostie,
    Global Vice Chair, Transaction Advisory Services

    Our 11th Capital Confidence Barometer predicts healthy growth for M&A globally, which should take the market back to levels last seen before the financial crisis.

    Acquisitive appetite has increased and deal fundamentals — credit, cash and prices — are strong, as is confidence in economic stability. The biggest indicator of this positive sentiment is deal pipeline, which has increased by a remarkable 30% since April.

    In addition, two-thirds of executives expect M&A pipelines to expand further over the next year — more than double the number expecting expansion six months ago.

    As we predicted in our previous Barometer, 2014 has seen a big increase in multibillion-dollar deals. Now, increasing competition at the top end and a renewed focus on growing core businesses will fuel more middle-market deals.

    The majority of acquisitive companies are now focusing on M&A to strengthen their core business, with an eye to boosting market share, managing costs and improving margin growth.

    Megadeals are set to continue. However, the next chapter of the M&A story should be middle-market deals fueling an M&A rebound globally.

  • M&A – middle market to dominate

    CFOs say middle market will be M&A growth engine

    Despite geopolitical issues and macroeconomic uncertainty, CFOs surveyed for EY’s latest Capital Confidence Barometer remain extremely bullish about their M&A prospects.

    In fact, CFOs are more confident about M&A today than they were six months ago. The number of finance executives who expect their deal pipeline to increase over the next 12 months has doubled since May (57% versus 28%).

    This data mirrors the findings of the latest CNBC Global CFO Council poll results, in which well over half of CFOs report above average deal activity compared to their historical norm.

    How do you expect your deal pipeline to change over the next 12 months?
    EY - How do you expect your deal pipeline to change over the next 12 months?

    These growing pipelines point to a future uptick in the number of deals, which looks set to be largely fueled by the middle-market (defined as deals valued at less than US$1b).

    What is the maximum single deal value expected over the next 12 months in US dollars?
    EY - What is the maximum single deal value expected over the next 12 months in US dollars

    CFOs are also growing their pipelines because they must. As their rigor around deal making has increased, they need to consider more acquisitions to support their search for strategically aligned deals.

    Local M&A markets improving

    Moreover, 61% of CFOs expect their local M&A market to improve, compared to 53% who felt that way six months ago. The data also shows that executives are more optimistic about the number of acquisition opportunities, the quality of opportunities and the likelihood of being able to close acquisitions.

    Even in regions facing economic headwinds, CFOs are confident. In Asia-Pac, for example, 69% of them feel positive about the likelihood of closing acquisitions, despite the fact that China’s GDP growth is slowing. In Western Europe, this number is 62%.

    Deal pipelines to increase

    A large majority (57%) of CFOs expect their deal pipeline to increase over the next 12 months – somewhat fewer than the 70% of non-CFOs who think the same. This is line with other survey findings, which generally show CFOs are more conservative in their optimism than their non-CFO counterparts.

    However, at both the global and local level, CFOs are more confident than their non-CFO counterparts in the likelihood of acquisitions, the quality of acquisition opportunities and the number of acquisition opportunities, which bodes extremely well for the M&A market in the coming year.

    Please indicate your level of confidence in the following at the global level:
    EY - Level of confidence at the global level

    Bolt-on deals to dominate

    Despite all the bullishness over M&A, few CFOs expect deals to transform their businesses. In fact, more finance executives foresee bolt-on deals that complement their businesses, rather than remake them. There seem to be two drivers behind this trend.

    One is the need to take on less risk in their acquisition strategy. Another is how relatively straightforward bolt-on deals are to executives in order to improve the bottom line. Transformative deals are logistically more challenging, and there have been fewer opportunities in certain regions (such as Asia-Pacific) and particular industries (such as life sciences).

    Your planned M&A activity will mostly be:
    EY - Your planned M&A activity will mostly  be
    Which statements best describe your M&A plans?
    EY - Which statement best describe your M&A plans
  • Economic outlook - holding steady

    Expectations for growth have taken a step back, but so have concerns about a decline.

    While fewer CFOs surveyed for EY’s latest Capital Confidence Barometer believe the global economy is improving compared to six months or a year ago, more believe it is stable — and the proportion who think the economy is getting worse has dropped to negligible levels. 

    Business indicators trending positive

    Compared to sentiments about the overall economy, attitudes regarding key business metrics are highly positive and have improved over the past six months. More than three quarters of CFOs (77%) are confident in the outlook for corporate earnings, and 65% have confidence in the stability of markets in the short term.

    What is your perspective on the state of the global economy?
    EY - What is your perspective on the state of the global economy?

    Confidence brimming in Asia-Pac, but conservatism prevails in Europe

    Perhaps owing to concerns about geopolitical instability, finance executives in many places are more confident in their own local economies than the world economy, with 58% saying they believe their local conditions are improving.

    Executives in Asia-Pacific have the most positive economic outlook. More than 70% of CFOs polled in the region say the local economy is improving, and less than 1% say it is declining.

    Continued foreign investment interest in China, as well as intraregional investment between Asian countries and Australia, are some of the factors driving growth in the region. Southeast Asia is one area in particular showing positive activity.

    North America is not far behind. Nearly two-thirds (61%) of CFOs there believe the local economy is improving, and 37% say it is stable. Throughout the region, there is optimism in both the quantity and quality of acquisition opportunities, but quantitative easing (QE) tapering in the US has more companies looking to delever.

    In Europe, there is more modest optimism. Almost half (48%) of CFOs there believe the economy is improving, and 45% say it is stable. Movement toward a resolution of the European sovereign debt crisis suggests greater stability may be forthcoming.

    Globally, there is growing confidence in the stability of markets in the short-term, which is reflected in the fact that only 4% of CFOs have a negative view of their stock markets at the local level.

    Geopolitical risks loom large

    The perception that the economy has stabilized may be fueled, in part, by the relative absence of systemic shocks to financial markets over the last year. But tensions between Russia and the Ukraine, ongoing conflict in the Middle East and the Ebola crisis underscore the threat of geopolitical instability, which CFOs again cited as their top external risk factor.

  • Growth strategies – renewed focus on top line

    CFOs to balance growth with efficiency

    With economic headwinds showing signs of abating, CFOs surveyed for EY’s latest Capital Confidence Barometer are intensifying their attention on the top line.

    Nearly half (46%) of CFOs surveyed are now focused on their companies’ growth, and hiring talent is part of the strategy. The number of CFOs who indicated they plan to add jobs increased by more than half, from 30% to 46%, between April and today.

    Innovation is also playing a greater role in CFOs’ growth strategies. Last year, just 15% of CFOs said they planned to use technology to develop new products and markets.

    That number dropped to 10% in April 2014. Today, 38% of CFOs are investing in new technology to drive innovation, while another 31% are upping their investment in research and development.

    One potential factor driving the renewed emphasis on growth is senior management’s more positive outlook for several key metrics:

    • Corporate earnings
    • Short-term market stability
    • Credit availability
    • Equity valuations

    In the past six months, confidence levels in all of these areas have shown sizable gains, in many cases by double digits.

    Please indicate your level of confidence in the following at the global level
    EY - Please indicate your level of confidence in the following at the global level

    Corporate earnings, in particular, were very strong in the US in the second half of 2014, with 70% of S&P 500 companies beating Wall Street estimates. In the Eurozone and UK, performance was more mixed, with currency and regional concerns depressing results.

    Mindful of efficiencies

    While a greater number of CFOs have put increased emphasis on growth over the past six months, it has not come at the expense of cost reductions and operational efficiencies, which continue to be a priority for more than one-third of finance executives. The takeaway: even as companies display optimism about future growth prospects, they remain cautious and cognizant of lessons learned from the global financial crisis.

    Which statement best describes your organization’s focus over the next 12 months?
    EY - Which statement best describes your organization’s focus over the next 12 months?

    Achieving growth from within

    CFOs are keenly aware of investors’ preference that they focus efforts on their core business. As such, they have maintained, and even slightly increased, their focus on core products and existing markets compared to six months ago.

    At the same time, companies are showing an increased appetite for change. Higher-risk strategies being ramped up to accelerate and sustain organic growth include changing their mix of products and services offered and investing in R&D and technology to develop new markets and products.

  • Access to capital – debt discipline prevails

    CFOs disciplined about debt, despite easy availability of credit

    The CFOs surveyed for EY’s latest Capital Confidence Barometer see that access to capital is relatively unimpeded. Two-thirds are confident in the availability of credit at the local level. However, CFOs are being disciplined in the leverage they take on.

    More are choosing to maintain debt-to-capital ratios of 25% or less, while the number of highly-leveraged companies — those with a debt-to-capital ratio of 75% or more — has dropped significantly, from 9% to 2%. Such balance sheet discipline has companies well positioned to withstand any future rate hikes.

    CFOs looking to increase debt to finance M&A

    Having already achieved lower leverage, fewer companies are planning to deliver over the next 12 months. In fact, thanks to healthy balance sheets and strong corporate earnings, the proportion of CFOs who plan to increase their debt-to-capital ratios has increased by more than half, from 23% to 38%.

    Interestingly, their non-CFO colleagues show an even higher propensity: 47% of them expect to grow their debt-to-capital ratios. CFOs are planning to use debt to take advantage of the M&A market, but they are also trying to make better use of existing resources, adopting a balanced strategy of credit management to achieve growth in the near term.

    How do you expect your company’s debt-to-capital ratio to change over the next 12 months?
    EY - How do you expect your company’s debt-to-capital ratio to change over the next 12 months

    Anticipating rate hikes

    In the Americas, where QE formally ended in the US in late October, companies continue to be conservative in their debt financing. Just over one-third plan to deliver and, compared to the rest of the world, fewer companies in the Americas are taking on debt. The most common approach — shared by 38% of CFOs — is to stay the course in regard to debt-to-capital ratios.