Global Capital Confidence Barometer: October 2014

Middle-market deals to fuel M&A rebound

Middle market to drive M&A

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October 2014 | 11th edition

Global Capital
Confidence Barometer

Middle-market deals to
fuel M&A rebound

Our 11th Capital Confidence Barometer predicts healthy growth for M&A globally, which should take the market back to levels last seen before the financial crisis.

Our previous Capital Confidence Barometer correctly predicted the rise of multibillion-dollar deals in 2014. With the climate still right for those large acquisitions, we can expect to see more transformational and innovative transactions.

However, the growth engine of M&A for the next 12 months should be the middle market (defined as deals valued at less than US$1b). Our analysis of year-on-year changes in deal volumes shows that previous upturns have been led by mega- and upper-middle-market deals, followed by an upswing in the lower middle market. Large transactions create M&A activity further down the deal chain.

Key findings

A note from
Pip McCrostie

Global Vice Chair, Transaction Advisory Services

Pip MccrostieOur 11th Capital Confidence Barometer predicts healthy growth for M&A globally, which should take the market back to levels last seen before the financial crisis.

Acquisitive appetite has increased and deal fundamentals — credit, cash and prices — are strong, as is confidence in economic stability. The biggest indicator of this positive sentiment is deal pipeline, which has increased by a remarkable 30% since April. In addition, two-thirds of executives expect M&A pipelines to expand further over the next year — more than double the number expecting expansion six months ago.

As we predicted in our previous Barometer, 2014 has seen a big increase in multibillion-dollar deals. Now, increasing competition at the top end and a renewed focus on growing core businesses will fuel more middle-market deals.

The majority of acquisitive companies are now focusing on M&A to strengthen their core business, with an eye to boosting market share, managing costs and improving margin growth.

Megadeals are set to continue. However, the next chapter of the M&A story should be middle-market deals fueling an M&A rebound globally.

About this survey

The Global Capital Confidence Barometer gauges corporate confidence in the economic outlook and identifies boardroom trends and practices in the way companies manage their Capital Agendas — EY’s framework for strategically managing capital.

The results are based on responses from more than 1,600 global executives from 62 countries surveyed over August and September 2014, conducted by the Economist Intelligence Unit (EIU).

M&A outlook

The appetite to execute deals is high, and pipelines are bulging and set to expand further. M&A activity is about to reach pre-crisis levels.Transformative M&A will continue. However, the strongest growth in M&A activity in the coming year will be middle-market momentum as companies strengthen their core businesses.

The spate of megadeals during 2014 is having a ripple effect on the M&A market. They increase confidence in M&A and trigger transaction activity further down the deal chain.

Strong deal sentiment across many sectors

Macroeconomic environment

Despite a continuation of disruptive external influences, greater confidence in global economic stability is laying the foundation for future M&A. The number of executives that view the global economy as stable has almost doubled in the past 12 months, and fewer executives today believe the economy is declining.

Corporate earnings have been strong, particularly in the US, and other market indicators are also positive, bolstering the positive M&A story. Executives are now confident enough to expect to create jobs or hire talent.

More than they did six months ago, companies see increasing geopolitical risk as a potential threat to their business, but this uncertainty isn’t dampening their desire to forge ahead with M&A.

Shareholder activism

Activist shareholders influence boardroom agenda

The C-suite agenda — organic and inorganic growth priorities — is increasingly swayed by the growing influence of shareholder activism.

Global megatrends

Massive global changes reshaping corporate strategies

Corporate strategy

Companies are making moves to position themselves for growth in a challenging environment shaped by fast-emerging global megatrends and enhanced shareholder engagement.

In line with their growing confidence in global economic stability, more companies are expanding their core business by changing their mix of products and services and increasing product introductions. Our survey shows a threefold increase in the number of companies adopting both of these strategies

Corporate strategy in depth

Resources

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