UK appetite for growth increases but confidence tempered leading to smaller, lower risk investment and M&A, says EY survey

4 November 2013

  • Share
  • Economic confidence at two-year high and 37% of executives planning acquisitions up from 26% a year ago
  • Uncertainty over future earnings, rising valuations; and concerns over reputation, political risk and regulation in the boardroom - acting as drags on investment
  • 90% of respondents expect to execute deals below US$500m
  • UK plc is looking to reshape its geographic portfolio of investment destinations to US, the BRICS and Africa at the expense of Europe

LONDON, 4 November 2013. Almost 80% of UK executives expect deal volumes to improve over the next 12 months, according to EY’s ninth bi-annual UK Capital confidence barometer, a survey of 1,600 senior executives launched at today’s CBI Annual Conference. With credit availability growing and leverage being allowed to increase to support M&A, over a third (37%) of companies will pursue acquisitions in the next 12 months compared to 26% a year ago.

More positive sentiments around deal-making stem from a growing economic confidence which has risen dramatically over the last 12 months — 78% expect the global economy to improve, compared to just 18% a year ago. Those who see the economy declining fell to 3% compared to 34% last year - its lowest level in two years.

But the positive outlook in the UK is tempered by worries over future earnings, uncertainty over valuations; and concerns over reputation, political risk and regulation in the boardroom, all acting as drags on investment. UK boardroom agendas continue to have a significant focus on fiscal discipline (74% focus on efficiency & cost control) and risk management (70%) but the focus in the last 6 months has increased dramatically on both the regulatory environment (65% up from 56%) and corporate governance (63% up from 50%).

Confidence tempered leading to lower risk investment and deals

Jon Hughes, EY’s Transaction Advisory Services Leader in UK & Ireland, says: “Both globally and in the UK, M&A sentiments are being buoyed by a much more positive view of deal fundamentals – there have been notable increases in the number and quality of acquisition opportunities, as well as a significant improvement in the likelihood of successfully closing deals. All of this is underpinned by growing confidence in the UK and global economy. 

“But despite this relatively bullish outlook for growth and deals, confidence amongst UK boardrooms is tempered, leading to a desire to pursue low risk, incremental growth strategies with a focus on organic moves around core products and existing markets. Deals are likely to be smaller and will be designed to increase market share. So while deals will be done, transaction decisions will be made with one eye on risk aversion.”

Mark Gregory, EY’s Chief Economist and transaction partner, adds: “The increasing focus on regulation and corporate governance is a wake up call for politicians. Constant intervention in the market unnerves business and it is important the right balance is struck that does not scare off investment. Political risk is back around the world and the UK needs to be careful it does not lose its long established competitive edge in this area.”

Smaller deals in UK points to risk averse strategies

The survey supports this view.  Of the UK Executives who expressed the intent to engage in M&A, 35%  pointed towards their desire to focus on the smaller end of the deal range (US$50m or less) which is a significant increase when compared to April, when it was only 18%. Those intending to do deals over US$1bn dropped to 4% from 9% and in the US$51-500m deal range, respondents fell from 70% to 55%.
This is in sharp contrast to the global picture, with those expressing the intent to engage in momentum-creating deals (US$501m to US$1b range) more than doubling from six months ago, to 19%. Those focused on smaller transactions (< US$51m) fell to just 27%, from almost 40% 12 months ago, with greater confidence fuelling an appetite to do larger deals.

UK looks to focus investment on a more balanced geographic portfolio

The survey also revealed that UK plc is looking to reshape its geographic portfolio of investment destinations. The top 5 destinations for would-be deal-makers in the UK are: USA, India, Brazil, South Africa and China.

Of UK respondents, 25% are looking to invest into BRIC nations compared with 10% a year ago. Expected UK investment in Europe has fallen from 33% to 14%, reflecting management’s desire to capture growth in developing regions. But this is balanced with an expected increase of investment into the US - from 8% in October 2012 to 17% this year.

Gregory continues: “Over the next 12 months UK companies will allocate their investment capital across a broad base of destinations. The research has revealed that the BRIC countries are increasingly seen as vital to growth but so too is the USA, Africa and the Middle East, at the expense of Europe, Asia and South America - providing a more balanced portfolio for UK business.”

A shift to robust deal-making as investing tops capital agenda

Over the past 12 months the focus of corporates’ capital agenda has shifted – the appetite to invest has nearly doubled, while the intention to preserve capital has fallen by two thirds.
Hughes adds: “Companies have weathered a prolonged period of uncertainty during which time they strengthened their balance sheets and optimised their capital structures. Having warehoused cash for a number of years and with ready access to credit, leading UK corporates are in a strong financial position to do deals – they now have more confidence to pull the trigger.”

Gregory concludes, “But with conditions and fundamentals at their most favourable for a number of years, it raises the big question – what is the sticking point to larger deals being done in more significant numbers?

“For many, organic measures alone can no longer meet growth mandates and deals will be the best route to meaningful growth. Barring any further significant economic or geo-political shocks, we should see the resuscitation of the M&A market which has flat-lined in recent years.  In the UK there is clearly an appetite for growth and deals but we are still waiting for the first movers to emerge.”