Global executives say M&A's will rise, yet only a moderate increase in acquisitions planned

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A major rebound in confidence in the global economy among large corporates is not yet translating into expected capital investment and M&A activity, according to Ernst & Young’s eighth bi-annual Capital confidence barometer (pdf, 3.7mb), based on a survey this month of 1,600 senior executives in 50 countries.

The surge in confidence, fueled by positive expectations around economic growth, corporate earnings and credit availability, sees 87% of companies now viewing the global economy as either stable or improving. Fifty-one percent globally (SA 30%) now believe the global economy is improving outright – more than double the 22% (SA 19%) recorded in October 2012.

This increased confidence has fostered a strong consensus among global corporates that M&A volumes will increase – 72% expect global deal volumes to rise over the next 12 months, whilst SA respondents expect a 45 % within the same period. There’s also an increase in expectations of SA respondents to pursue acquisitions, increasing to 52% compared to 46% in Oct 2012. A slight increase in expectations to pursue acquisitions, increasing to 29% compared to 25% in October 2012 has been also raised by global respondents.

Sectors most likely to see acquisitions in SA are technology, financial services, consumer products, technology, automotive and life sciences. All deals are expected to be less than $500m, while the top three investments destinations outside of South Africa is: Nigeria, Kenya, and Mozambique
Emmanuel Essien, Associate Director for Transaction Advisory Services at Ernst  & Young, Africa, comments, “South African businesses that have previously taken the “risk” to venture ahead in some sector growth activities; have also reaped from the benefit of first mover advantage in those sectors and countries. The survey results indicate that South Africa capital confidence is on the rising; however there seems to still be a need for motivation to spur business to move in the foreseeing direction.”

Regulatory environment

83% of SA respondents believe that the regulatory environment is supportive of business growth initiatives at the global level while 65% believe that the regulatory environment is supportive of business growth initiatives at the domestic level.

Divesting for value

Mirroring exactly the number of would-be buyers, 29% of companies globally and 30 % in SA are planning a divestment within the next 12 months or have one in progress. The reasons for a sale – and the types of divestment – are increasingly complex and not necessarily driven by the traditional motivation of raising capital – focusing on core assets and enhancing shareholder value rank more highly as selling rationale.

Essien further comments, “Slowing growth in the emerging market has been attributed to the facts that businesses and projects are sometimes not so much prepared for long term participation on the buying and selling side of the coin; as well as the challenge of having a bankable feasibility study and professional information memorandum.”

When does risk aversion become a risk?

At 41%, the number of SA respondents seeing improvement in the credit availability is the highest in the last two years - a significant increase in credit availability noted at the global level compared to six months ago. The majority of respondents view credit availability at the global level as stable or improving (37% and 49%, respectively).

Whilst 48% of SA respondents will use cash as the primary source to fund deals in the next 12 months (compared to 35% in Oct 2012, less than one third (30%) plan to use the debt as the primary source for deal financing despite the improvement in credit availability. The majority of global respondents will also use cash as the primary source to fund deals in the next 12 months (54% compared to 42% in Oct 2012).

Preference for inorganic growth has grown significantly (32% compared to 8% in Oct 2012) while preference for organic growth has gone down to 31% from 38% in Oct 2012.

  • Top two drivers for inorganic growth strategy are:
    • Gain share in new markets (product or geography); and
    • Reduce costs and improve profitability / margin.

Essien concludes, “With 65% of SA respondents expecting the local economy to grow in the range of 1% to 3%; and 17% believing growth will exceed 3% in the next 12 months; which could be seen as a cautious indication for decision making in the board room. However, it also implies that businesses, given the right motivation would definitely make the right moves in the right direction for investments and growth.”

About the survey

The Ernst & Young Capital confidence barometer is a survey of 1600 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 in the next 12 months, and to identify the emerging capital practices that will distinguish those companies that will build competitive advantage as the global economy continues to evolve. This is the eighth bi-annual Barometer in the series, which began in November 2009.

About Ernst & Young

Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 167,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.

Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. This news release has been issued by EYGM Limited, a member of the global Ernst & Young organization that also does not provide any services to clients.

Following on from Ernst & Young’s successful integration in 2008 of 87 countries into one area from across Europe, Middle East, India and Africa (EMEIA), the firm has launched its Africa Business Center™ (ABC), which aims to enhance the effective and efficient links between its geographic reach and areas of expertise. The firm enjoys representation in 33 countries across Africa.

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