Twice as many global businesses actively seeking M&A targets in next 12 months, compared with six months ago
62% expect financing to fund major projects available in next 12 months London, 15 April 2010 – Optimism is growing in the global M&A environment as 57% of businesses state they are likely or highly likely to acquire other companies in the next 12 months, almost double that of the 33% six months ago, according to a new study of over 800 senior executives around the world by Ernst & Young. In fact, 47% expect to do so in the next six months, compared with 25% when surveyed last November.
The second bi-annual Capital confidence barometer (pdf, 701.9kb), conducted in late March, also finds 76% of businesses are now focused on growth, compared to 56% six months ago. Confidence in credit conditions is also improving, as 62% expect financing to fund major capital projects and acquisitions to become available in the next 12 months.
Pip McCrostie, Global Vice-Chair, Transaction Advisory Services, at Ernst & Young, says: “With greater liquidity, we are seeing companies more willing to make acquisitions they have previously deferred. The study shows that we now have more potential buyers than willing sellers, which could lead to an increase in hostile approaches.”
Economic confidence improving
Confidence in the global economy as a whole is improving – 40% of respondents expect the downturn to end within 12 months, compared to 30% last November.
We see 64% of respondents now more optimistic about the prospects for their local economy and 69% for the prospects for their company. The most optimistic countries are Australia (93%), India (91%), Brazil (83%) and China (80%). While some of the western developed markets were the least confident – France (44%), US (56%) and UK (57%).
In terms of industry sectors, 61% of respondents expect the downturn to end in their industries within 12 months, compared to just 49% six months ago.
Among the sectors, the survey shows Automotive as the most confident of growth (81%) with Power & Utilities the least confident (59%). Yet it is the Power & Utilities sector that is, together with Pharma and Life Sciences most focused on inorganic growth, including through M&A. 69% of Oil & Gas companies are the keenest to sell businesses, through planned divestments within the next six months.
New dynamic: buyers focused on future potential rather than past performance
The global downturn has had a significant impact on deal dynamics. A new development is that potential buyers are looking more closely at growth opportunities such as revenue growth rate, future market share and new customer markets, rather than historical data.
Post-deal integration is now also critical with 77% citing potential synergy identification and realization in transactions as a high priority. This may in part be a recognition of past mistakes – almost one third (32%) of respondents stated that the last transaction they completed did not meet expectations or was not actively monitored in terms of value achieved.
“The deal process is evolving,” says McCrostie. “More time and focus is being given to potential synergies, as well as assessing future market potential. Discipline is needed around integration processes and greater transparency is required from sellers around the future earnings potential of the target. We see investors increasingly focused on understanding the value they need to achieve post-transaction.
Challenges still remain
Against a backdrop of increasing optimism we still see some significant challenges ahead. For instance, a wave of refinancing is expected with 58% of companies needing to refinance loans or other debt within the next four years – so access to capital markets remains crucial.
McCrostie continues: “Driving operational fitness and working capital management remains absolutely critical. While the need for operational restructuring has declined since the previous survey, more than third of companies (35%) still need to restructure their core business.
“However, it is clear from the results that we most companies have learnt some valuable lessons during the downturn – 86% have reviewed their working capital processes and made some improvements. That said, 54% of these have been tactical and short-term improvements, so ongoing discipline is still needed.
“Overall, this latest survey shows us that those companies who acted – and continue to act – decisively and swiftly to adapt to the downturn are now moving ahead of the competition and have laid foundations for market leading success. Essentially, our findings continue to underline one critical fact: 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 800 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 follow up to the first Barometer in November 2009.
About Ernst & Young
Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 144,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. For more information, please visit www.ey.com.
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