Deals back on corporate agenda

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Friday 29 November 2013 — The number of New Zealand companies intending to make acquisitions has jumped in the past six months, EY’s latest Australasian Capital Confidence Barometer shows.

The report is based on a global survey of almost 1600 executives in 72 countries, including 125 in Australia and 26 in New Zealand.
The results show 34% of Australasian respondents (31% in New Zealand), intend to pursue an acquisition in the next 12 months, up from 24% in April this year (24% in NZ) and 20% a year ago (23% in NZ).
Similarly, the number of companies focused on growth has almost doubled in the past year to 70% (73% in New Zealand) - the highest in two years.
In New Zealand, 54% of respondents say they expect their organization to create jobs in the next 12 months, compared with 31% a year ago. Only 8% say they plan to reduce the size of their workforce, compared with 15% a year ago, while 38% expect to retain their current workforce numbers (54% a year ago).
EY New Zealand’s Transactions Advisory Services leader, Andrew Taylor, says: “It’s clear from the barometer that growth is back on the agenda. Confidence has been buoyed by gathering momentum around the Canterbury rebuild, a forecast record payout by Fonterra and improving consumer sentiment.”
Confidence in both the local and global economic outlook is up, with 77% of New Zealand respondents expecting the local economy to grow – albeit modestly - compared with 50% six months ago.
 “During the past few years, companies have squeezed earnings growth through cost savings. Now, with expectations for improved GDP growth and earnings outlook, and greater stability in global markets, deal-making is back in focus in New Zealand.
“Despite having plenty of cash and access to capital, until now local corporates have been hesitant to do deals. That seems to be changing.”
Nearly half the Australasian respondents expect M & A valuations to increase in the next 12 months and 38% expect the valuation gap – the difference between vendor and purchaser price expectations – to widen in the next 12 months.
EY New Zealand TAS partner Gareth Galloway says deal flow has steadily increased in recent months. “We’ve also noticed a steady pick-up in valuation mutliples offered by bidders. There are more buyers than sellers in the market.”

Capital allocation moves up boardroom agenda

While efficiency and risk management remain at the top of the boardroom agenda, capital allocation is back in the spotlight. A year ago, only 49% in Australasia said capital allocation was getting more attention by boards; today 67% view it as a higher priority, indicating changing sentiment.
“This increasing focus on growth is more reflected in corporate’s capital agenda. After a long period of uncertainty, boards are prepared to look at well-considered transactions again. Today 69% of NZ survey respondents are looking at investing capital, up from 45% a year ago,” Taylor says.
“Companies are looking at innovative ways to transact. There traditional buy/sell is still there but so too are joint ventures, demergers and refinancings. There are different  ways to get things done; companies are now being more innovative.
“We have weathered a prolonged period of uncertainty when companies have strengthened their balance sheets and optimized their capital structures. Having warehoused cash for several years, and with ready access to credit, leading corporates are in a strong financial position to do deals. They now have the confidence to pull the trigger.
“This does not mean we will see a return to boom-time deal-making. That was unsustainable but so too is the M & A recession we’ve experienced since 2009. Barring any further significant economic or geo-political shocks, we should see a lift in the global M & A market which has flat-lined in recent years.”

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This news release has been issued by Ernst & Young New Zealand, a member firm of Ernst & Young Global Limited.

Contact details:
Andrew Taylor
EY New Zealand Head of Transaction Advisory Services
Tel: + 64 27 289 8449

Gareth Galloway
EY New Zealand Transaction Advisory Services Partner
+64 27 489 9075