EY Capital Confidence Barometer April 2014 - October 2014

Mergers & acquisitions — measured moves, bigger deals

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Increasing deal value could be the M&A story of the next 12 months.

Deal volumes — currently at record lows — are expected to increase only marginally. And large, transformational deals will make headlines rather than any significant increase in global deal activity. Key sectors planning transformational deals include retail and wholesale, power and utilities, telecommunications, technology, mining and metals, and oil and gas.

EY infographic showing survey respondents’ deal expectations

Expectations for larger deal sizes rising: Companies’ intentions to engage in larger deals (greater than US$500m) over the next year are up strongly, having doubled in 12 months. This is a sign that plans for transformational acquisitions, particularly among larger companies, are on the rise.

In addition, given that the number of companies planning acquisitions over US$1b has more than doubled in six months alone, we can expect an increase in headline-generating, high-value strategic deals in the coming year.

Sectors that define the big deal landscape: Respondents in asset and real estate-intensive industries such as retail, power and utilities, telecommunications, oil and gas, mining and metals, and automotive expect to pursue the biggest of the big deals (defined as US$500m or more in deal value). Technology respondents also expect to pursue larger deals, where high multiples are likely a key factor.

Nearly one-third expect to pursue acquisitions: Currently, 31% of companies expect to pursue acquisitions in the next 12 months. Respondents’ confidence in the number, quality and likelihood of closing deals is holding steady. However, this will likely translate into only a modest increase in deal volume as the baseline for M&A activity is reset lower in a slow-growth environment.

Valuation gap narrows: As the economic recovery takes hold and the demand for growth accelerates, the gap is contracting between the price companies are willing to pay for assets and underlying valuations. Almost half of respondents believe the valuation gap is now less than 10%, and a vast majority expects valuation gaps to remain the same or contract over the next year.

Marginal improvement anticipated in deal pipelines: Looking at the next 12 months, our respondents anticipate some growth in their deal pipelines. Roughly 3 in 10 respondents expect their pipelines to increase; only 9% expect a decrease. That suggests improving sentiment — but with 60% reporting no change in outlook, any rise in M&A volumes this year is likely to be modest.

Balanced investment intentions: Investment intentions are broadly similar across all markets, suggesting companies are looking at balancing emerging market and mature market investments. Emerging markets remain very important — BRICs for medium-term growth and non-BRICs for longer-term growth. However, developed markets are critical for precious short-term growth.

European economies attract capital, along with certain BRIC economies: The most notable entrants into our top five capital destinations are the UK and Germany. This signals a rebalancing of emerging and mature market investment priorities and a return to confidence in Europe.

However, among our top investment destinations, companies plan to allocate their most significant capital (more than 10%) to China, India and Brazil. Holding steady within the top five is the US, a perpetual destination for global capital.

Top five investment destinations and their top three investors

United States

United Kingdom

Germany

India

China

Mergers & acquisitions — measured moves, bigger deals

EY infographic showing survey respondents’ deal expectations ×