Large headline-hitting deals to take center stage in the next year as deal volumes remain steady
London, 7 April 2014
Large acquisitions look set to steal the M&A headlines over the next 12 months as global companies place fewer but bigger bets on the deal table, according to EY’s tenth bi-annual Capital confidence barometer, a survey of more than 1,600 senior executives in 54 countries. The global environment for major transformational acquisitions has significantly strengthened as leverage returns and companies take measured bold moves. However, appetite for acquisitions at 31% will keep deal volumes flat for the next year.
- Global companies pursuing $1b+ M&A deals more than doubles
- Immediate acquisition appetite flat at 31% but third of deal pipelines to increase
- Renewed cost management strategies driven by shareholder activism
- Re-balancing of M&A investment between emerging vs mature markets
Global companies’ intentions to engage in larger deals (greater than US$500m) have doubled in 12 months – 12% to 27%. Those intending to do the bigger deals over US$1b have also more than doubled to 12% in the past six months alone – a clear sign that plans for transformational acquisitions are accelerating. Respondents’ confidence in credit availability at a global level is at its highest level in five years, with 88% considering credit availability as improving or stable.
For the first time Barometer respondents have indicated what their actual deal pipeline looks like, with almost a third (29%) expecting it to increase over the next 12 months – which could point to increased volume longer term. However, in the near-term, executives have to balance their growth priorities and make selective M&A choices. They are increasingly being encouraged to focus on cost reduction by activist shareholders, with 93% saying the boardroom agenda is heavily influenced by shareholder pressure – 47% expect to pursue cost reductions as a result.
Pip McCrostie, EY’s Global Vice-Chair, Transaction Advisory Services, says:
“Value not volume will be making headlines in the near-future, with prominent large deals part of an emerging trend – in 2014 we have seen a 25% increase in deal value but an 11% fall in volume globally. After a prolonged financial crisis and M&A market malaise, companies and boards are opting for quality rather than quantity.”
“Shareholder activism is ensuring managing costs and delivering measured growth remains a permanent feature of a complex business landscape. With growth harder to come by in a low-GDP world economy, many executives are adopting a twin track approach. On the one hand, companies are looking at innovative organic growth strategies – to develop new products and open new markets – and selective but bold inorganic moves in the market. On the other, they are looking at more creative ways to drive down costs.”
Valuation gap narrows
The gap is contracting between the price companies are willing to pay for assets and underlying valuations. Almost half of respondents believe the valuation gap is now less than 10%, and a vast majority expect valuation gaps to remain the same or contract over the next year. This will foster an environment in which companies can close larger, strategic deals.
Mrs. McCrostie says: “The fundamentals for high-value deal-making are very favorable. Historically this would have translated into a wave of global M&A. However, the complexity of the challenge facing executives today means M&A is more measured. Geopolitical instability, a fragile global economic recovery and seismic shifts in far-reaching ‘megatrends’ such as structural changes in the workforce and digital transformation are all key considerations – and all at a time of unprecedented shareholder activism.”
Despite shocks, recovery is resilient
Economic confidence is more resilient than at any time in recent years, with 60% of respondents viewing the global economy as improving. Economic pressures — such as slowing emerging market growth, the tapering of quantitative easing in the United States- and geopolitical unrest in the Middle East and Eastern Europe temper confidence to some extent, as 30% of executives perceive global political instability to be the greatest economic risk.
Re-balancing of investment destinations
The top five investment destinations balance emerging markets such as India and China, with a continued focus on mature markets such as the US, UK and Germany. The largest proportion (39%) of companies’ acquisition capital over the next 12 months is expected to go to BRIC emerging markets, although there are broadly similar intentions across BRIC, mature and frontier emerging markets. The next five most favored destinations show a similar balance of emerging and mature markets: Brazil, Ireland, Japan, Singapore and United Arab Emirates.
Those sectors looking to do the biggest of the big deals are: retail and wholesale, power and utilities, telecoms and technology, metals and mining and oil and gas. Sectors with the highest level of anticipated deal volume are financial services, power and utilities, life sciences and oil and gas.
Parallel priorities - growth a priority but cost management rules
McCrostie concludes: “Given disruptive mega-trends, geopolitical unpredictability and low growth in the global economy it’s no surprise that many executives are balancing confidence and caution. The result is a strategic focus that combines cost management and growth – including highly selective acquisitions.
“The much-anticipated convergence of economic confidence and strong deal fundamentals into notably higher deal volume globally is still not in sight. As we look forward to the future, looking back at the M&A boom years should no longer be the yardstick to compare deal activity – expectations need to be revised down as the deal volume ‘norm’ is reset lower in this continued slow growth environment.
“Low deal volume globally will be part of the M&A landscape for the foreseeable future. But we can expect high-value headline-hitting M&A given the upsurge in the appetite for much larger deals as executives look to transformational acquisitions to move the growth needle.”
Notes to Editors
About the survey
The EY Capital confidence barometer is a survey of 1600 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 tenth bi-annual Barometer in the series, which began in November 2009.
EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.
EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.
This news release has been issued by EYGM Limited, a member of the global EY organization that also does not provide any services to clients.