Improving confidence but mixed M&A messages

• One-third of global businesses actively seeking targets in next six months; longer term most opt to hold on to cash
• Greater confidence in economic outlook and capital markets
• Longer-term M&A appetite down from 12 months ago as organic growth becomes dominant priority
• New internal barriers threaten to restrict deal-making
• Growing sense of urgency for those still to re-finance

LONDON, 14 April 2011 – One-third of global businesses are looking for new acquisitions in the next six months, suggesting an increase in M&A activity in the near term.

Even against a backdrop of continued political instability, economic uncertainty and natural disasters, corporate executives are increasingly optimistic about the global economic outlook, with a fifth fewer businesses than six months ago expecting the financial turbulence to last beyond another 12 months. However, while cash levels are at an all time high after years of refinancing, and some recent high-value deals in the market, companies are opting to hold fire in the longer-term, according to the fourth bi-annual Capital confidence barometer, by Ernst & Young.

The survey of over 1,000 senior executives around the world, conducted in March, finds that more than half of respondents (56%) said capital market conditions were continuing to improve with access to funding for capital projects not a problem for 38% of respondents. Yet, despite recent upticks in M&A deal values, a fifth fewer businesses cite it as a priority compared to 12 months ago, while organic growth is the dominant priority for almost 50% of businesses, nearly double that of 18 months ago.

Pip McCrostie, Global Vice-Chair, Transaction Advisory Services, at Ernst & Young, says:

“It would be difficult to call an M&A bounce-back with great confidence given the many complex issues in play – both internally within businesses and externally given natural disasters and political developments in the Middle East. Add to that the prospect of rising inflation and taxes and the complexity of the situation only goes to underline the uncertainty in the global market and the challenges executives are faced with.

“Some of the critical foundations are in place: there’s cash on balance sheets and a greater access to credit but that has been the case for some time. Recent indicators suggest an uptick but that’s based on deal value – deal volume remains sluggish. Last year we saw a number of false starts and promised M&A booms that stalled. We could undoubtedly see a lot of increased activity in some markets and certain sectors, but 2011 looks to be no less challenging or predictable than 2010.”

Short-term vision
A number of high-value deals have completed in the market over the last quarter, and since October there has been an 18% uptick in the number of companies likely to acquire in the next six months. But the proportion likely to acquire in the next one to two years has continued to fall to just 44% (compared to 54% in October 2010 and 67% in April 2010).

An increasing number of companies also say they are planning divestment activity over the next six months – a fifth (18%) are likely to dispose of assets. At the same time, the percentage likely to divest over the next one to two years fell a third suggesting some companies have accelerated their plans to unload assets.

McCrostie continues: “There is a distinct contrast between what businesses plan in the next six months and what they see in 12 months and beyond. Some companies are undoubtedly accelerating plans; others are finding it safer to consider organic options rather than M&A for growth.”

New M&A barriers as investor caution eases
The number one deal breaker now is the gap between buyer and seller expectations, which increased to 50%. Concern over the uncertainty or complexity of valuations was significant for 49% of respondents.

Companies cited the two biggest difficulties associated with completing a deal were a lack of management time and resource (65%) and the need to build consensus among multiple stakeholders (63%). In October 2010 the biggest obstacle to completing an M&A transaction was investor caution: over half of companies (52%) cited it as a problem. That is no longer the case. Investor caution is still a difficulty, but it has eased a little (down to 48%).

Rush to re-finance is almost over
Over the last two years 80%of companies have re-financed their balance sheets. But for those that are in the market for funds, there is real urgency to access capital. Two-thirds of those needing to re-finance, must do so within six months.

Many still face significant stress in their business operations – and 8% remain focused simply on survival, of those 75% indicate they have stress in their core and subsidiary businesses, many citing liquidity pressures as their single biggest problem. Illustrating the depth of challenges still being faced, more than half of all respondents – 55% – report stress or distress in their core business.

Says McCrostie: “Stress and distress is still very much a part of the equation. While many companies have taken action to address their financial issues by preserving cash and improving their working capital, others still need to work through the process. The companies that have done so are now moving into a new phase of optimizing their activities to achieve sustained organic growth – they’ve taken difficult decisions and are now looking at ways to get fitter still.”

Emerging markets targeted
The percentage of companies considering an emerging market acquisition in the next six months has increased by 50% over the last 18 months. By contrast, interest in developed-market transactions is low and falling. However, fewer than half (47%) of respondents had considered their exit provisions before making an investment.

“Companies continue to look for inroads into the emerging markets where growth outlook is higher than in developed economies. However, an emerging market investment, even with the support of an experienced joint venture partner, can entail significant risks, not least in the areas of political uncertainty and business culture. Even those organizations that are in for the long haul should give careful consideration to how they might exit their investment, should the need arise.” says McCrostie.

About the survey
The Ernst & Young Capital confidence barometer is a survey of over 1000 senior executives from large companies around the world and across industry sectors. The objective of the Barometer is to gauge corporate confidence in the economic outlook, to understand boardroom priorities in the next 12 months, and to identify the emerging capital practices that will distinguish those companies that will build competitive advantage as the global economy continues to evolve. This is the third half-yearly Barometer in the series, which began in November 2009.

About Ernst & Young
Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 141,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.

Ernst & Young expands its services and resources in accordance with clients’ needs throughout the CIS. 3,500 professionals work at 18 offices in Moscow, St. Petersburg, Novosibirsk, Ekaterinburg, Kazan, Krasnodar, Togliatti, Yuzhno-Sakhalinsk, Almaty, Astana, Atyrau, Baku, Kyiv, Donetsk, Tashkent, Tbilisi, Yerevan, and Minsk.

For more information about our organization, please visit www.ey.com.