Stakeholder caution is still a serious obstacle, but it has eased a little (down to 46%).
Mixed messages for M&A
The surge in global confidence is encouraging businesses to focus on growth rather than defensive measures.
In the short term, appetite for acquisitions is increasing, but overall, companies are focused on organic growth. This caution is driven by three dominant external factors that have arisen in the past six months:
- Political instability in the Middle East
- Natural disasters and their impact on supply chains
- Tax and inflationary concerns.
A third of companies are likely to acquire in the next six months. Since October there has been an uptick (from 28% to 33%) in the percentage of companies likely to acquire in the next six months reflecting newfound confidence in economic recovery.
Longer-term, nearly half of all companies expect to be acquisitive. The proportion likely to acquire in the next one to two years continues to decline. However, if the external factors diminish, we could see this figure increase.
How likely are you to execute acquisitions in thefollowing periods?
| 36% |  | of US companies surveyed are likely to acquire in the next six months. |
Acquisitive sectors in the next six months include power and utilities, oil and gas, and pharmaceuticals
Divestment activity is also expected to rise in the short-term.
A fifth (18%) are likely to dispose of assets. Mirroring the acquisition trend, the percentage likely to divest over the next one to two years falls (from 27% to 19%).
How likely are you to execute divestments in thefollowing time periods?
Barriers to M&A are increasing
The No.1 deal breaker now relates to the valuation gap between buyer and seller expectations, which leapt by nearly a third (from 38% to 50%). In October 2010, the biggest obstacle to completing an M&A transaction was stakeholder caution: more than half of companies (52%) cited it as a problem.
Stakeholder caution is still a serious obstacle, but it has eased a little (down to 46%).
Management challenges, meanwhile, have grown in significance. Concerns over the uncertainty or complexity of valuations are significant and growing (from 41% to 49%).
Management is additionally demanding a stronger business case before supporting a transaction: the percentage of companies saying that business case thresholds or hurdle rates are blocking deals increased by a third (from 30% to 39%).
Emerging markets continue to drive growth
Enthusiasm for globalization and emerging market investment remains strong as companies look for ways of fueling growth.
The percentage of companies saying they are considering an emerging market acquisition within six months is 50% higher than it was in November 2009 and continues to rise
By contrast, interest in developed market transactions is low and falling (to 18% from 21% this time last year).
Likelihood of undertaking emerging and developed marketacquisitions in the next six months.
Sectors most likely to acquire in the emerging markets are automotive, consumer products, mining and pharmaceuticals
The most popular structure for an emerging market transaction is a joint venture/alliance (29%). This is not surprising given the significant risks associated with an emerging market investment, not least in the areas of business culture and growing domestic protectionism. Moreover, many organizations will be experiencing these risks for the first time.
For most the No.1 priority remains organic growth
Continuing the trend we saw in October, almost half (49%) of all companies are focused on organic growth, representing a 100% increase from 18 months ago. By contrast, only a third of companies say they are focused on M&A activity, a small increase on October 2010 but still a fifth fewer than 12 months ago.
Which statement most accurately describes yourorganization's focus over the next six months?
Short-term fixes remain important, but the focus now is on building sustainable improvements
In the aftermath of the financial crisis, leading companies took immediate protective steps to preserve cash and reduce costs. Companies are now focusing on improving long-term business performance.
In October 2010, two-thirds of companies were focusing their efforts on cutting costs and improving cash flow. While these remain key priority areas, the percentage of companies planning to give increased focus to them over the next 12 months is falling (from 67% in October 2010 to 57% now).
Companies are now moving on to the tougher challenge of building sustainable improvements into their business operations.
Areas where they plan to invest greater effort include customer segmentation (38%), performance management of subsidiaries (32%) and optimizing capital structures (27%).
There is also increased effort on acquisition integration and tax efficiency which doubled (from 6% to 14% and 5% to 10% respectively).
Top 5 areas of focus for businesses over the next 12 months.
The two-speed boardroom
The business outlook is improving for companies that have completed refinancing and started the work of optimizing their operations. But for those left behind, the opportunity to catch up could be disappearing fast. This polarization is clear.
While the majority of companies have refinanced their balance sheets and set a strategic course, one in 10 remain focused simply on survival. Such companies will increasingly find themselves with their options diminished. For some, their business model has been permanently impaired.
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