Capital Confidence Barometer, October 2013
Mergers & acquisitions — more and larger deals expected
“True intent” to make larger deals is now visible — as expectations for deals greater than US$500m and up to US$1b have more than doubled in the last six months.
These expectations, along with increased deal volumes, are clear indicators that a more robust deal-making environment is on the horizon. They signal companies have confidence in their capital structures, in deal fundamentals and in a sustainable economic recovery.
As companies begin to act on their intentions for deal-making and their imperative to grow, it will trigger deals of varying size across the global marketplace. Sectors with the highest level of anticipated deal-making are telecommunications, life sciences, oil and gas, automotive, consumer products and technology.
Q: What is your expectation for global M&A/deal volumes in the next 12 months?
Global deal volumes expected to improve
Almost 70% of executives expect deal volumes to improve over the next 12 months. Deal volumes resonate from the alignment of core fundamentals: positive economic sentiment, enhanced credit availability, the imperative for growth and the expectation to create jobs.
Growth in volume will also come from the returning strength of mature markets, which brings incremental growth in the BRICs and new frontier economies.
M&A expectations rise — driven by increased quality, number of opportunities and likelihood of deals closing
With core fundamentals in place to support M&A, over one-third of companies will pursue acquisitions in the next 12 months vs. just one-quarter a year ago. This 40% improvement in the number of companies expecting to pursue acquisitions resonates from the notable increase in the last 12 months in the number and quality of acquisition opportunities, as well as significant improvement in the likelihood of deal closing.
Clear focus on larger deals
Executives who expressed the intent to engage in larger deals (i.e., US$501m to US$1b range) more than doubled from six months ago. And those focused on smaller transactions (<US$51m) fell to just 27%. These are significant shifts that clearly indicate a more robust deal-making environment is on the horizon.
Although acquisition capital will be allocated globally — the primary share is designated for mature markets
Mature economies will attract the majority of acquisition capital over the next 12 months. The returning desire to invest in the mature markets is attributable to a rebound in their economies, as well as the perceived safety and quality of underlying opportunities.
Emerging market interest grows
Over the last 12 months, 47% of executives indicate they have placed greater focus on investing in the BRIC (27%) and non-BRIC (20%) emerging markets as they search for new strategic opportunities. However, the mature markets continue to be an important investment destination.
M&A in slowing-growth emerging markets requires more transaction rigor
While certain emerging markets have experienced slowing growth, executives remain largely optimistic about the opportunities they present, provided greater rigor is applied to deal-making. Unlike their mature counterparts, emerging markets continue to rapidly evolve and transaction risk must be managed.
Valuation gaps expected to widen
As transaction volumes accelerate, there is a natural divergence between buyers’ and sellers’ expectations on pricing. Thirty-one percent of executives expect valuation gaps to widen over the next 12 months vs. 17% six months ago. This widening gap results from buyers and sellers adjusting their expectations at different rates.