M&A pipeline builds momentum
Monday 9 November 2015
Australian deal activity is set to rise with 53% of local companies planning acquisitions in the next 12 months, up from 44% six months ago, according to EY’s latest Australasia Capital Confidence Barometer.
The biannual report is based on a survey of more than 1,600 executives in 53 countries, including 144 in Australasia (Australia and New Zealand).
Globally it is a similar story with 59% of companies planning to acquire in the next 12 months. Deal pipelines locally and globally have also ballooned, with 83% of Australasian companies now having three or more deals in the pipeline and 55% of companies globally. Six months ago just 25% of local companies had deal pipelines of three or more.
EY Oceania Transactions Advisory Leader, Julie Hood, says the bullish M&A appetite is being driven by the continuing low growth domestic economy, changing business models and the need to secure competitive advantage.
“How and what companies are investing in today is increasingly crucial to future business growth and sustainability, with every sector and every company facing change. So the corporate strategy discussions that CEOs and Boards are having now are more complex than ever before,” says Hood.
“Technology and changing consumer preferences are disrupting business models and blurring sector boundaries. Executives are focusing on M&A to secure innovation, competitive advantage and market share for the foreseeable future.”
This is reflected in the 29% of local and 48% of global companies planning acquisitions outside their own industry. Of the local companies planning cross-sector M&A, 57% are being driven to do so by changes in customer behaviour and 30% are seeking access to new materials or production technologies.
Similarly, organic growth plans are now focused on R&D and new technology. Significantly more companies have shifted their organic growth efforts from conventional strategies (core products, existing markets) to more innovative strategies (R&D, new technology) – 85% today compared with 68% six months ago.
Confidence in economic outlook
The vast majority – 92% - of Australasian companies believe the local economy is stable or improving, with the proportion of those that believe it is improving soaring from 47% six months ago to 80% today.
Australasian companies are also more positive about the global economic outlook, with three-quarters believing the global economy is strongly improving compared to the consensus view of modestly improving six months ago.
Globally and locally, increased global and regional political instability is seen as the main economic risk over the next 6-12 months.
Currency and commodity volatility has been the key issue elevated on boardroom agendas in the past six months for 71% of companies locally and 40% globally.
Deal metrics, credit availability sentiment positive
Companies remain confident about deal metrics, with 82% of local executives positive about the quality of acquisition opportunities, 78% positive about the number of acquisition opportunities, and 85% positive about the likelihood of closing acquisitions.
While 84% of local companies say credit availability is improving, this masks the ongoing disparity between larger corporates and mid-market companies.
In the next year, 87% of Australasian companies expect their deal pipeline to grow and 71% expect to accelerate their deal activity.
“Companies are turning to M&A for growth and at the same time they know they have to make capital work harder today, so they need to be asking ‘is this the right deal strategically’,” says Hood.
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