Capital market conditions improve yet fewer global businesses actively seeking M&A targets compared to six months ago
• Growing buyer/seller gap creates conditions for hostile approaches
• A third likely to make emerging markets acquisitions in next six months
• Local economic confidence higher by 67% but global confidence wanes London, 18 October 2010 — Despite the return of favorable conditions for mergers and acquisitions (M&As), a quarter fewer (29%) global businesses are actively seeking acquisition targets, in stark contrast to the appetite for deals six months ago (38%). The fall comes despite only 16% feeling restricted in their ability to pursue growth through M&As compared to 40% a year ago, according to a survey of over 1,000 senior executives around the world, by Ernst & Young.
The third bi-annual Capital confidence barometer, conducted in October, also finds greater optimism among executives about their own company and local economy prospects tempered by greater pessimism about the global picture. Austerity measures, increasing taxes, currency conflicts and regulatory concerns among other issues are undermining confidence in the global economy and reducing the appetite for M&A.
Half of respondents now feel well positioned to execute an acquisition at short notice – up from 36% in 2009 – but more companies are reluctant to commit to a deal. The majority of those that are, look to acquire in emerging markets. There may be a drop in the appetite for M&A generally but we could see some bold first-mover activity given the fall in respondents saying they were likely or highly likely to make a divestment over the next six months (down to 15% from 38% in April) was higher relatively, than the fall in buyers – increasing the gap between the number of potential buyers and willing sellers.
Pip McCrostie, Global Vice-Chair, Transaction Advisory Services, at Ernst & Young, says:
“Our previous barometer predicted the recent spate of large deals in August, but the appetite for M&A in the next six months has dropped. However, as large companies sit on growing cash reserves and their restrictions to do M&A ease, the pieces are in place for opportunistic and hostile approaches.
“Over the last year boards have responded to ongoing uncertainty by improving their ability to respond quickly to opportunities that may arise. Yet boardrooms remain cautious, due to investor caution, regulatory and political changes – driving a greater focus on organic growth and performance improvement.”
Seventy-five percent of respondents are now focused on organic growth as their capital allocation priority, through restructuring and performance improvement, compared to 66% six months ago.
Emerging markets targeted
Most companies recognize the imperative for an emerging markets strategy to position them for future growth and plan M&A accordingly. A third (31%) said they were likely to undertake or seriously consider an emerging market acquisition in the next six months. By contrast, interest in developed markets acquisitions has remained flat over the last six months.
Over half of those who planned to invest in the emerging markets expect to enter via a joint venture or strategic alliances, which also show an upward trend.
“Companies continue to look for inroads into the emerging markets where growth outlook is higher than in developed economies. However, acquisitions must open new markets and bring synergies. Companies need to fully explore joint ventures and strategic alliance arrangements particularly in higher risk geographies”, says McCrostie.
Credit conditions improve
Overall optimism is increasing for local economies, as 67% of respondents feel more confident about the prospects of their local economy compared in April. Levels of confidence in India (92%) and China (82%) remain high compared to six months ago, but former leader Australia drops out of the top five most confident economies. Russia (89% from 47% in April) and Germany (84% from 64%) enter the top five, while France (66% from 44%) has also seen a large rise in confidence.
In contrast, the outlook for the global economy is less optimistic, with 34% believing recovery will happen within the next 12 months, compared to 40% six months ago.
“Local confidence has improved, but one day’s optimistic data is still being followed by another day’s cause for concern, undermining optimism globally. As austerity measures are put in place, the anxiety seen across the world is being transmitted into the boardroom. Confidence in the global economy is key for investors before they return to M&A”, says McCrostie.
Over half (58%) said credit conditions were better now than in April. However, the global picture is patchy. Among the BRIC nations, the majority of executives said the situation had improved, but in the UK and US, only 33% and 47% respectively, see such an improvement.
Companies’ increasing ability to invest in their business is fortified by easing access to finance. Low rates have made debt markets increasingly attractive, and banks have been willing to work with borrowers’ circumstances.
Indeed, of the companies considering M&As, 61% are planning to fund deals with cash, while bank loans have increased too, other forms of debt and bonds have declined considerably.
As a result, 52% of companies have no need to refinance loans or other debt obligations, an increase of nearly 10% on April 2010. Of the 48% of companies that do need to refinance, 63% plan to do it within the next 12 months.
“Over the next 12 months, those that have excess capital are likely to view the M&A market opportunistically but continue to focus on organic growth. For those who have not secured new financing or refinanced debt the prospect becomes increasingly difficult as capital becomes increasingly scarce and expensive. Some could even become targets for acquisition”, says McCrostie.
High risk – high reward
McCrostie concludes: “With many more companies now in a strong cash position they could well be placed to take advantage and make ‘all cash’ offers to shareholders. While buyers are likely to pay a premium now, in two years they will pay even bigger premiums.
“With a smaller number of assets available in the market we are likely to see an increase in the number of unsolicited and hostile bids.
“Nobody will get fired for not doing a deal, but there will be opportunities to make a game-changing strategic move - the risks may be high but so too are the rewards. How organizations manage their capital today will define their competitive position tomorrow.”
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About the survey
The Ernst & Young Capital confidence barometer is a survey of over 1000 senior executives from large companies around the world and across industry sectors. The objective of the Barometer is to gauge corporate confidence in the economic outlook, to understand boardroom priorities in the next 12 months, and to identify the emerging capital practices that will distinguish those companies that will build competitive advantage as the global economy continues to evolve. This is the third half-yearly Barometer in the series, which began in November 2009.
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