Boardroom focus shifts from deals to operational improvements as appetite to do M&A falls 50% in the UK
- Appetite for M&A falls among senior execs from 52% to 26% year on year
- Confidence dips: 82% see no improvement in the economic situation compared to 49% last year
- Concerns over the economy and valuation expectation gap are biggest barriers to deals
- Market uncertainty is leading to inertia
The appetite for mergers and acquisitions (M&A) has halved year on year, according to a survey of board executives, as both the global economic environment and Eurozone crisis has forced a focus on bottom-line performance improvements rather than growth.
UK executives are pointing towards low confidence in the business environment (21%) and the gap between buyer and seller expectations (20%) as the primary reasons for not pursuing deals - according to Ernst & Young’s seventh bi-annual Capital confidence barometer, that surveyed more than 1,500 senior executives in 41 countries last month.
There is also a sharp decline in companies planning to divest in the next 12 months, from 38% in April to 15% today, which could lead to fewer willing sellers coming to the deal table.
Mark Gregory, Ernst & Young’s chief economist and transaction partner, says, “Despite having large cash stock piles and adequate access to capital, executives are waiting for a sustained recovery before engaging in M&A – they are more reluctant to make a move in this economic environment of low or stagnant growth.
“Our analysis suggests that deal volumes are 30-40% below the level we would expect given current stock market valuations. This may in part be explained by the impact of QE on market price levels but it does appear that there is a real lack of appetite for risk.”
Rhys Phillip, head of M&A at Ernst & Young in the UK, adds, “The research shows that confidence in the UK economy has fallen again over the last 12 months although the survey response suggests that there is a growing belief we have reached the bottom with a more stable outlook in the UK.
“Consolidation of existing business and managing closely the factors that can be controlled to preserve shareholder value is the focus of the majority of executives in the current environment.”
Choppy waters across the Eurozone and beyond
Companies are less optimistic about the future than they were in April with the proportion of businesses in the UK saying they have been affected by the Eurozone crisis, rising to 93%. Only 18% of respondents believe the global economic situation is improving compared from 51% six months previously, while 82% have seen no improvement since then. The number of companies who report declining sentiment increased from 19% to 34%.
Perceptions of the UK economy are far more negative than those globally, with 39% of domestic executives believing that the state of the economy is in decline, compared to only 20% globally.
UK dealmakers target smaller deals
With M&A sentiment subdued, even those looking to acquire have relatively modest aspirations. Nearly 50% say they will do deals worth $50m or less and 36% between $51m and $500m.
Phillip adds, “The deals that are happening are strategic, focused and generally smaller in size. Deal drivers are less footprint expansion and more those that will enhance shareholder value through refocusing the business or driving efficiencies in operating profit.”
From growth to efficiency improvements
While growth remains the number one objective for 36% of executives, this is a significant drop from April when it was 54%. It is also the lowest percentage of executives citing growth as their top priority since October 2010. Inorganic growth has also seen a fall, with only 10% of executives focused on this compared to 17% in April and 19% a year ago.
Compared with six months ago, there is an increased concentration on optimising capital by reducing costs and improving efficiency with 76% showing a greater focus on these areas today.
Deleveraging is also a priority – underlining corporate aspirations of moving from growth to returning cash to stakeholders with 34% of respondents planning to use excess cash to pay down debt, versus 20% in April, and 17% in October last year.
“An increasing number of executives are looking to improve bottom-line performance through preserving cash and cost efficiencies, rather than growing organically or pursuing inorganic growth,” says Phillip.
“Companies are focusing attention on deleveraging and strengthening their balance sheets against a backdrop of ongoing uncertainty in many mature markets and some softening of growth in emerging markets.”
Gregory adds, “There is a real paradox: corporates tell us efficiency improvements are a priority yet the intention to divest is very low. A real strategic focus on efficiency would lead to more companies reshaping their portfolios and directing their capital to its most efficient uses.”
He concludes, “The economic outlook is not going to improve significantly in the medium term. Companies must adjust their strategies and decision criteria to reflect the future economic reality, not that of the past. In a market like this, where good opportunities exist for those corporates with an eye for a deal, fortune will favour the brave. Value is not going to be created by waiting for a major upturn that is a long way off.”