M&A is back and set to stay strong

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Monday, 27 October 2014 - Growing numbers of Australasian corporates are returning to the M&A market and deal pipelines are set to swell rapidly in the next 12 months, EY’s latest six-monthly Australasia Capital Confidence Barometer shows.

The Barometer, released today, shows the number of companies intending to pursue an acquisition in the next 12 months has more than doubled from 32% six months ago to 66% now. At the same time, corporate confidence in the quality and number of acquisition opportunities is at a four-year high.

The report is based on a global survey of more than 1,600 senior executives in 54 countries, including 157 in Australasia (Australia and New Zealand).

EY Oceania Transaction Advisory Services Leader Graeme Browning says that after a number of years of low transaction activity, Australasian companies are catching up their global counterparts in pursuing deals again.

“Anyone sitting on the sidelines risks being left behind. This is an opportunity for sellers as well as buyers,” he says.

However Browning warns that in the rush to get deals done, there is a danger that corporates may over-pay for assets or fail to extract value from acquisitions.

“Deals are back but the game has evolved. We expect to see a lot more contested M&A in the next 6-12 months. Success will come to those who are absolutely clear on strategy, disciplined with due diligence and move quickly.”

“A lot of value is created or missed during integration. Buyers must plan for this early, and then do the hard yards post-deal.”

“There are now new players, including hedge funds, superannuation funds and buyers from across Asia, who have different costs of capital and longer term horizons – Australian companies need to understand these different drivers to win.”

Confidence in economic outlook strong

Almost two-thirds (65%) of local corporates believe the local economy is improving, in line with 66% six months ago and up from 57% a year ago. Similar numbers of local (63%) and global (53%) respondents believe the global economy is improving.

Similarly, the majority of local (90%) and global (77%) corporates are also optimistic about corporate earnings.

On the employment front, 96% of local and 93% of global corporates are either planning to create jobs or maintain the size of their workforce.

The only real cloud on the horizon is growing unease about increased global political instability and the potential impact it could have – nearly half (45%) of corporates noted this as the greatest economic risk to their business in the next 12 months, up from 31% six months ago and well ahead of other concerns including quantitative easing (22%) and slowing growth in emerging markets (14%).

Gearing set to rise

While gearing remains at very conservative levels – 72% of local companies have debt-to-capital ratios of less than 25% – this Barometer provides the first clear signal for five years that gearing will start to rise, with more than two-thirds (68%) who expect their debt-to-capital ratios to increase over the next 12 months.

“Confidence in credit availability remains stable, but competition for capital is heating up, driven in part by Australian state and federal government sales of public assets. Although infrastructure attracts a particular type of investor, these sales still draw on the finite pool of capital available,” says Browning.

Growth focus shifting

Growth remains the focus for nearly two-thirds (62%) of corporates while around a quarter (28%) are maintaining their focus on cost reduction and operational efficiency.

While bolt-on deals remain the prevailing transaction preference, transformative growth is now on the agenda for more than a third (36%) of local respondents.

“It will be interesting to see how many future deals are sparked by opportunities to change an organisation’s cost structure, either by acquiring scale or increasing capabilities to drive efficiencies. In a period of lower GDP growth in Australia and globally, M&A will provide the growth many companies are looking for to get ahead of their competitors,” says Browning.

More local corporates are also embracing higher risk organic growth strategies, with 44% now looking at changing their products and services mix, up from just 17% six months ago.

Corporates need to sharpen deal skills

Corporate confidence in key deal metrics has surged – 66% are confident in the likelihood of closing acquisitions, up from 31% six months ago; 63% are confident in the quality of acquisition opportunities, up from 37%; 74% are confident in the number of acquisition opportunities, up from 57%.

However, at the same time local corporates also see more challenges ahead for deal-making than their global counterparts.

Local respondents are most concerned about deal execution and integration, with 43% citing this as their main M&A challenge, compared with 30% of global respondents. More than a third of Australasian corporates say they lack both the internal resources to handle deals (37%) and sufficient management focus on M&A (35%).

Almost a third (30%) say they have overestimated the strategic value of assets while 31% say ‘poor execution of integration’ (compared to 17% globally) was one of the most significant issues contributing to deals not meeting expectations.

“The companies that sat out the past few years and have underinvested in their M&A teams need to quickly rebuild,” says Browning.

“Before even casting an eye out for prospective acquisitions, companies need to be clear about their growth strategy and think hard and early about how to use M&A to create competitive advantage.”

Key findings in Australasia

  • 96% believe the economy is improving or stable, on par with 95% six months ago and up from 80% a year ago
  • 66% intend to pursue an acquisition in the next 12 months, compared to 32% six months ago
  • 68% expect their debt-to-capital ratios to increase over the next 12 months, compared to 32% six months ago and 19% a year ago
  • 90% are confident in corporate earnings, compared to 77% six months ago and 46% a year ago
  • 72% are confident in credit availability, compared to 71% six months ago and 46% a year ago
  • 81% are confident about equity valuations, compared to 63% six months ago and 25% a year ago
  • 75% are confident in short-term market stability, compared to 61% six months ago and 20% a year ago

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Notes to editors

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Contact

Megan Ball
Ernst & Young Australia media relations
Tel: +61 2 8295 6427