Eurozone volatility and low GDP growth leads to UK corporates battening down the hatches rather than splashing cash on M&A
- Over 90% of UK corporates admit eurozone crisis has impacted their business
- Only 20% of corporates consider opportunistic M&A
- Corporates stock piling cash but few will spend on M&A
- Divestments high on the agenda for UK corporates
LONDON, 8 May 2012 – Volatility across the eurozone and negative GDP growth has forced UK companies to refocus their corporate lens on cost reduction and supply chain transformation in a bid to stave off revenue and margin pressure - rather than focus on opportunistic M&A - according to Ernst & Young’s sixth, biannual, UK Capital confidence barometer.
The study - which canvassed the views of over 1,500 senior executives around the world, including 138 in the UK – revealed that despite there being a more stable global economy, the eurozone crisis combined with stuttering domestic growth has taken the shine off UK corporates’ confidence in their willingness to do deals, with 91% admitting that the eurozone crisis has impacted their business.
Only 20% of respondents said they are planning to undertake opportunistic M&A to take advantage of the opportunities presented by the eurozone crisis. This compares to nearly 70% who said they would focus on cost reduction and supply chain transformation – a strategy leaning towards managing risk.
Mark Gregory, Ernst & Young Chief Economist and Partner in transaction advisory services said, “Against a back drop of poor GDP figures and volatility across the eurozone, caution rather than confidence is driving M&A sentiment across the UK. Businesses, faced with lower demand in their domestic and European markets, coupled with rising energy and raw material bills, are focusing on stripping out costs and mitigating risks rather than spending cash on opportunistic M&A. Risk management has become risk avoidance.”
M&A confidence wanes
When asked whether they would expect to pursue an acquisition in the next 12 months, 40% of UK corporates responded positively, a downward trend from 52% 6 months ago. The primary reasons were lack of deal execution and integration capabilities, and low confidence in the business environment, 19% and 30% respectively.
Compounding the lack of confidence, there has been a 40% drop in the number of UK corporates intending to focus on growth in the last 12 months.
“The worse than expected GDP data confirms our suspicions – some businesses are paralysed by risk and holding back on investment. In the last year there has been more than a 40% fall in the number of UK businesses intending to focus on growth. Action is required to restore confidence and to develop a credible plan for growth,” he adds.
Stock piling cash for a rainy day not M&A
A combination of stronger operating results, cost reduction programs and risk aversion has meant that large companies have accumulated large stockpiles of cash. Among those companies who say they have either engaged in M&A or are thinking about it, over half (51%) say that they will use cash as their primary source of funding, with 31% willing to use debt and 18% to use equity.
Significant conservatism is apparent as over 80% plan to use 20% debt or less in transactions compared to 69% in October 2011.
Of those corporates with excess cash, 68% are focused on growth over the next 12 months, but only 17% are doing so through M&A, with the rest concentrating on organic growth.
Dougald Middleton, Ernst & Young partner in transaction advisory services, added, “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 and a distinct lack of confidence over the strength and stability of the economic recovery and the significant unknowns presented by the eurozone crisis.”
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 optimisation and divestment. The proportion of companies planning to sell assets over the next 12 months has risen from 21% this time last year to 38% today. This trend towards divestment has been driven by a desire to focus on core assets (56%), while shedding underperforming business units is declining as a driver at 23% compared to 50% in October of last year.
Dougald Middleton explains, “Companies are looking to focus on streamlining their operations and there is still a desire to grow their stock pile of cash, with a view to save for a rainy day. More companies are now looking inwardly – at managing their portfolios and non-core assets – rather than outwardly at potential buying opportunities. Those businesses looking to acquire and to divest in the UK are slightly higher than the global average, which could signal more activity.”
So what’s the deal in the short term?
In light of recent GDP figures it comes as no surprise that corporate UK remains extremely cautious in their outlook over the short term, as Mark Gregory concludes, “While the economic recovery remains fragile at best, companies are unwilling to commit the time and resources to M&A and the defensive cash accumulation mind-set across may well continue to be the norm. However, there could come a point when shareholders could exert pressure or governments might incentivise companies to do something with excess cash. If this happens we could see a rapid increase in M&A activity.”