Lower Economic Confidence Clouds Deal-making Outlook
New York, 8 October 2012 – Waning global economic confidence has dealt mergers & acquisitions (M&A) activity another blow as boardrooms and CEOs are hunkered down in the United States (US), according to EY’s latest Capital Confidence Barometer, based on a survey of more than 1,500 senior executives in 41 countries around the world. Seventy-six percent of those surveyed in the US think that the global economy shows no signs of improvement, and the percentage of US companies planning an acquisition in the next 12 months fell to 23% from 34% six months ago.
US respondents say a recovery in the global economy is at least one to two years away or more. Despite these negative forecasts, the US remains remarkably resilient as an investment market, as global respondents rank the country behind only China as the most attractive destination to pursue an acquisition. Other top countries for global investment include India, Brazil and Germany. US companies named China, India, Brazil, the UK and Mexico as their top preferences for foreign investment.
"Corporate leaders are less optimistic about the economy and there is less urgency for companies to do deals,” said Richard M. Jeanneret, Vice Chair, Transaction Advisory Services at Ernst & Young LLP. “There is plenty of opportunity for M&A, and more countries are looking towards the more stable US economy to invest, signaling that a global M&A recovery, when it does arrive, might be led by the US.”
For those US companies that are planning M&A in the next year, financial services, mining & metals, consumer products and industrial products were selected as the sectors most likely to see M&A activity in the next 12 months.
Cash continues to build and access to credit remains stable
Despite declining optimism in the global economy, deal fundamentals are still relatively strong. Cash on balance sheets continues to build and access to credit remains stable. There is approximately $1.3 trillion in cash on US corporate balance sheets 1. Seventy percent of US respondents believe credit is either stable or improving, although this percentage is down from 80% in April. While credit is broadly available, particularly to large-cap enterprises, US companies cite a modest decline in credit availability with only 28% viewing credit markets as improving compared with 37% in April.
Companies shifting to performance-optimization
With conservatism slowing acquisition plans, despite stable deal fundamentals, companies are shifting away from buying and selling and are focusing on improving performance. The number of US companies planning to divest in the next year dropped considerably to 16% compared with 34% in April.
“Over the past 18 months, we’ve seen companies move decisively toward optimizing their portfolios by selling or otherwise divesting a business that did not fit their strategic objectives. With fewer divestments planned, this may indicate a shift from a divestment phase to a performance-optimization phase in the capital life cycle for many companies,” said Jeanneret.
Sentiment around asset pricing and confidence in deal execution may slow M&A
With companies anticipating less M&A in the next year, executives have confidence in their deal execution and integration capabilities, but have lowered confidence in the business environment and are becoming concerned about a growing valuation gap as the top reasons for the sluggish M&A market. Twenty-one percent of US companies’ expect deal prices will decrease compared with just 12% in April.
“The pace of deals could slow as buyers take a tentative stance and executives wait for a sustained recovery before taking action,” added Jeanneret.
Focus on inorganic growth slows as companies hunker down and prioritize deleveraging and returning cash to stakeholders
Against a backdrop of uncertainty, companies report an increased focus on strengthening balance sheets, reducing costs, improving efficiency and maintaining stability, compared with six months ago. Growth remains the top priority for US companies for the foreseeable future. However, the focus on inorganic growth has declined as companies are positioning for a slow recovery with low or stagnant growth rates.
Companies’ intentions with regard to excess cash underline the declining sentiment toward inorganic growth. More companies (52%) are focused on deleveraging and returning cash to stakeholders. Furthermore 36% of respondents plan to deploy excess cash toward organic growth, compared with 44% in April.
“Companies are taking a more conservative approach to managing capital either by paying down debt or returning cash to shareholders,” Jeanneret said.
As companies predict a longer than expected economic recovery, the outlook for M&A remains muted and boardroom deal-making conservatism is expected to persist as companies increasingly focus on performance-optimization over inorganic growth.
"Companies that are actively managing their capital today and are not blinded by pessimism will be poised to take advantage of the opportunities that may be out there,” Jeanneret concluded.
1 Cash on the balance sheets of Fortune 1000 (excluding financial services organizations) as of 9/30/12, source S&P Capital IQ
About the survey
The EY Capital Confidence Barometer is a survey of over 1,500 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 over the next 12 months, and to identify the emerging capital practices that will distinguish those companies and build a competitive advantage as the global economy continues to evolve. This is the seventh half-yearly Barometer in the series, which began in November 2009.
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