Large corporates have the means but lack motivation for M&A
- Global M&A expectations fall despite more positive economic
- Focus shifts from buying opportunities to optimizing portfolio and core business
- Rise in sellers as companies look to build cash piles and divest non-core assets
LONDON, 26 April 2012 – A more favorable deal making environment is not yet convincing large corporates to engage in M&A, according to Ernst & Young’s latest Capital confidence barometer, based on a survey last month of more than 1,500 senior executives in 50 countries around the world. Only 31% of those surveyed said they expected to pursue an acquisition in the next 12 months down from 41% in October 2011 – a drop of a quarter and the lowest figure since the barometer began in late 2009. In contrast, the number of businesses looking to sell assets has risen from 26% to 31% – up by a fifth.
In terms of acquisitions, companies in the financial services, life sciences, oil and gas, technology and consumer products sectors said they were more likely to do deals. Metals and mining, automotive and power and utilities companies are less positive in their M&A outlook. Companies headquartered in India, UK, the US and Germany were among the most bullish, while their counterparts in Japan and Russia were less so. When asked where they will do deals, China, India, the US, Brazil and Indonesia were the top five target markets.
Pip McCrostie, Global Vice-Chair, Transaction Advisory Services, at Ernst & Young, says:
“Despite strong fundamentals for a pick-up in activity now being in place, caution rather than confidence is driving global M&A sentiment. With better access to credit and large cash piles, companies have the means and the methods to do deals but their motivation is tempered by concerns over the strength and permanence of the global economic recovery. Concerns over what they see in the short-term are also clouding the longer-term view on critical M&A matters such as valuations.”
That gap between economic confidence and active corporate deal making is highlighted by current data showing that M&A volumes globally were down 22% in Q1 20121 compared to the same period last year.
If they are buying it’s with cash
A combination of stronger operating results, cost reduction programs and risk aversion has meant that large companies globally have accumulated large stockpiles of cash. Among those companies who say they either reengaged in M&A or thinking about it, almost half say that they will use cash as their primary source of funding. Debt saw a modest increase in popularity as means of deal funding due to low costs and an improved confidence by business in credit availability. The proportion of those that would use debt to finance an acquisition increased to 39% from 33% six months ago.
More companies sold on divesting
The overall conservative nature of the respondents attitudes towards M&A is reflected in their focus on creating value by organic growth, portfolio optimization and divestment. The proportion of companies planning to sell assets over the next 12 months has risen from 26% in October 2011 to 31% today – a 19% increase in six months. As Pip explains, “Companies are looking to focus on streamlining their operations and there is still a desire to grow their stock pile of cash. More companies are now looking inwardly – at managing their portfolios and non-core assets – rather than outwardly at potential buying opportunities. Divestment is especially pronounced in North America; although we also expect it to grow across Europe and Japan in the coming months as companies look to re-position themselves as a result of Eurozone crisis and ahead of what is hoped will be an improving economic environment.”
Sectors most likely to pursue a divestment are: oil and gas, life sciences, consumer products, mining and metals and power and utilities. Companies headquartered in Brazil, Japan, UK, Germany and Canada are among the most inclined to sell assets.
Economic outlook brighter with a marked shift in developed markets
There were clear signs from the survey that the upswing in economic confidence was feeding through into overall business confidence. The proportion of those surveyed who thought that the global economic situation is improving has increased from 26% in October 2011 to 52% in April 2012. Only 20% remain pessimistic about the economy compared with 37% six months ago.
Among broader business confidence indicators, there were improvements in sentiment across the board with more positive figures for expected corporate earnings, employment growth, credit availability and the regulatory environment. The only indicator where there was a decline was in the proportion of respondents who held a positive outlook for short-term stability, which dropped from 14% to 5% compared to October 2011.
Economic and business confidence has rebounded most strongly in the US and parts of Europe including France and the UK. In contrast, confidence in the emerging markets although from a much higher base, has either stayed flat or declined – particularly in India.
Pip comments: “The relief in the Eurozone following the latest Greek debt restructuring and a more positive outlook in the US compared to late 2011 has given large corporates more confidence in the overall health of the global economy. However, with 86% of these global companies telling us that the ongoing Eurozone crisis has affected their business, the indications are that this could be a fragile recovery in confidence that will be difficult to sustain.”
So what happens next?
Despite the improvement in economic performance and modest uptick in business confidence, companies still remain extremely cautious in their outlook over the short term in particular.
Pip concludes: “While the global recovery remains fragile, companies are unwilling to commit the time and resources to M&A and the defensive cash accumulation mind-set will continue to be the norm. However, there could come a point when shareholders could exert pressure or governments might incentivize companies to do something with excess cash. If this happens we could see an increase in M&A activity.”
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 sixth half-yearly Barometer in the series, which began in November 2009.
About Ernst & Young
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1 Source ThomsonOne (accessed 02.04.12)