Top 4 key findings

1. 52% feel the global economy is moderately improving
2. Confidence in the local economy triples for the US and doubles for the UK
3. M&A appetite down 24%
4. Intention to sell up nearly 20%

Conservatism drives M&A outlook down and appetite for divestment up

Our sixth Global Capital Confidence Barometer finds that despite a more favorable deal making environment, leading corporates are not yet convinced to engage in M&A. Only 31% of those surveyed said they expected to pursue an acquisition in the next 12 months — a 24% fall compared with October 2011 and the lowest figure since the barometer began in 2009.

In contrast, the number of businesses looking to sell assets has risen by nearly 20% — a clear sign that companies regard portfolio management and a renewed focus on their core business as a priority.

This change in sentiment comes at a time when the fundamentals for M&A are stronger than they have been for some time. Credit constraints are lower and corporate cash balances are high, while confidence is rising following a prolonged period of macroeconomic instability. The valuation gap between buyers and sellers is also narrowing.

So why do we see M&A appetite falling in what should be a positive dealmaking climate?

While corporate executives are in a more confident frame of mind, they are still fundamentally cautious. Persistent market volatility, austerity measures, structural issues (primarily the Eurozone crisis) and potential for slowing growth in emerging markets have continued to dampen the appetite for acquisitions.

For the time being, conservatism among our respondents is dictating M&A sentiment, and buyers are proceeding with caution. However, if key stakeholders exert enough pressure for greater returns, M&A could again rise to the top of the capital agenda.

Pip McCrostie Global Vice Chair, Transaction Advisory Services

The current M&A landscape

Economic outlook

• Global economic outlook gains momentum
  After a turbulent period in the second half of 2011, the global economy shows some signs of stabilizing. The restructuring of Greek debt has provided some much-needed breathing space in the Eurozone.
• Earnings and employment growth fuel confidence
  Sentiment around corporate earnings and economic and employment growth underpin a more positive outlook in corporate confidence. In fact, 88% plan to maintain or increase their current workforce in the next 12 months.
• Confidence shifts from emerging to developed markets
  After three years in which corporations viewed emerging markets as the brightest hope for global growth, there are modest signs of a shift in sentiment.

Access to capital

• Credit conditions improving globally
  The Barometer panel believes credit conditions continue to show signs of improvement compared with six months ago.
• Global deleveraging trend slows
  Many companies have taken advantage of improved credit conditions and a favorable rate environment to strategically use additional leverage and reduce their cost of capital.
• Debt increases as a source of deal financing
  While cash is still the primary source of deal financing, the popularity of debt as a funding source is on the rise. Thirty-nine percent of respondents expect to use debt to finance deals, up from 33% six months ago.

Growth

• Desire for growth continues
  Growth continues to remain important to the Barometer panel, with the highest percentage of respondents ever, 52% citing growth as their primary focus.

Mergers and acquisitions outlook

• Appetite for M&A declines
  While most of the ingredients necessary for a deal recovery are now in place — plentiful cash reserves, adequate credit availability and rising economic confidence — the M&A market continues to be restrained by conservatism. Only 31% of respondents stated they plan to pursue acquisitions in the next 12 months, compared with 41% in October 2011.
• Divesting shifts from contingency to core strategy
  By contrast, respondents expect the number of divestments to increase over the next 12 months. The percentage likely to sell assets over this period has risen nearly 20%, from 26% to 31%. A key focus for companies is to streamline their organizations and make decisions about the businesses in which they should be competing.

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