One third of global businesses actively seeking M&A targets in next 12 months
Majority believe tough financing challenges will remain for at least three years London 12 November 2009: There is a growing sense of anticipation about the global M&A environment with 33% of businesses likely or highly likely to acquire other companies in the next 12 months, according to a new study of almost 500 senior executives around the world by Ernst & Young’s Transaction Advisory Services. In fact, 25% expect to do so in the next six months.
The study, entitled Why capital matters – building competitive advantage in uncertain times, is underpinned by the first in a regular series of surveys called the Capital confidence barometer, which was conducted in October. The survey finds that despite recognizing the opportunity for transactions, 62% of businesses feel their ability to act is restricted by various factors, including the lack of available financing.
Jon Hughes, UK&I Managing Partner of Ernst & Young’s Transaction Advisory Services group, says: “In the coming months, there is likely to be an increase in M&A activity as companies dispose non-core, underperforming or distressed assets. Those in a position to buy will have the opportunity to capture market share and grow revenues in ways that were impossible two years ago.
“Buying will not be an option for all. Capital is no longer cheap nor is it readily available. The tough new realities will force some executives to seriously consider a strategic review. Many companies have responded to the recession with short-term measures around cash and costs. Sensible though these were, they are largely temporary, buying breathing space. To thrive, companies need to be resilient and they also need to adapt quickly. That means being able to compete strongly for new funding options in a time of scarce capital, strengthening their core operations and having the ability to make opportunistic decisions.”
The survey found strengthening core operations is the primary transaction driver, with 64% considering acquisitions for this reason and 50% of executives are looking to acquire to enter new geographic markets — nearly half list the US as the most attractive developed market destination, while emerging markets were dominated by India (30%) and China (27%).
Sixty-three per cent of respondents are expecting to see acceleration of industry consolidation in the next 12 months, while 61% expect the downturn to reveal the emergence of a few industry winners best able to exploit acquisition opportunities.
Adapting to uncertainty
While M&A confidence is up, a strong note of caution is also reflected in the survey with 70% of companies expecting the downturn in the broader economy to persist beyond the next 12 months. Of those, 40% believe it will continue for more than two years.
Furthermore, 53% of respondents believe that financing conditions will not return to mid-2007 levels for at least another three years with 19% believing it will be over five years or it may never return to this level.
Dougald Middleton, partner and Head of Capital & Debt Advisory at Ernst & Young comments: “In 2010 finance will continue to be very difficult to secure. New options will need to be explored – from joint ventures to IPOs. In this complex and uncertain environment a strong capital agenda will be central to boardroom planning and strategy. Boards need new capabilities around performance reporting, forecasting and strategic decision modeling around capital that will, over time, become normal business practice. Leading businesses recognize that amid the new risks there is also opportunity – resilience must be enhanced alongside the ability to respond quickly as the market changes.”
Driving the capital agenda
While valuation uncertainty, insufficient financing, investor caution and board scrutiny are cited as current obstacles to doing deals, raising capital is recognized as a critical factor, with 46% prepared to consider alternative deal structures that depend less on debt.
Middleton adds: “We are already seeing leading boards drive a more focused, disciplined and rigorous management of their capital. Different options will suit different needs — whether it’s operational restructuring, divesting or acquiring opportunistically, but doing nothing and trying to ride out the storm is not a strategy for success.”
Survival of the quickest
In an environment where further distress will drive short notice accelerated timetables – readiness to act is critical for success. Forty-five per cent of executives expect an increase in distressed assets coming to market yet two thirds are not confident in their ability to act quickly. Only 36% say they are ready to act quickly should the right opportunity present itself.
“Boards will now need to juggle new demands in this environment. They will have to maintain investor confidence, win the competition for scarce capital, adapt to changing market conditions and exploit opportunities for growth. The winners will avoid the temptation of inertia and have the confidence to use their capital at a time when rapid decision-making could make the crucial difference between success and failure elsewhere,” says Hughes.
“The market will divide into those who quickly adapt and thrive and those who play by the old rules for these very new market conditions. A nimble response is needed, no matter the size of the organization – much like time and tide, market share waits for no-one.”
Vicky Conybeer