Record confidence – appetite for M&A activity on the rise

Thursday, 30 November 2017

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  • Close to three quarters of respondents believe global and local economies are improving
  • Record confidence levels as 63% of Australasian executives expect to pursue M&A in next 12 months
  • With record levels of dry powder, Private Equity is set to take a bigger role in the competition for assets
  • Australia - a top 5 global investment destination

The new normal of geopolitical uncertainty is proving no hindrance to Australian executives as they have M&A plans firmly in their sights over the next 12 months.

EY’s latest Australasian Capital Confidence Barometer – a bi-yearly litmus test on corporate sentiment shows a record number of local executives are feeling bullish about the macro-economic environment, with the strength of the global upspring now broadly based across regions and flowing through to stronger world trade growth.

After a buoyant first six months of 2017, the latest Barometer showed a continuing strong resurgence in economic confidence and positive corporate indicators among those surveyed.  In a major turnaround from twelve months ago, EY found the number of Australasian executives who think the global economy is improving has more than doubled (from 35% - 72%) and the percentage who feel positive about their own local economies has tripled (from 21% - 62%).

Record confidence levels

David Larocca, EY Oceania Transaction Advisory Services Leader said, “Geopolitical uncertainty has become the new normal, so Australian executives are moving forward with deal-making intentions at near record levels and well above their global counterparts.  Sixty-three percent of those surveyed intend to make deals in the next twelve months, compared to 56% globally. Almost 50% expect the number of deals in the pipeline to increase and 56% expect deal completions to increase.”

“We found that these acquisition ambitions are being largely driven by the desire to ‘future-proof’ their organisations against technology-driven disruption, bolstering their own internal digital resources and acquiring innovation and talent.”

The most active sectors pursuing acquisition in the next 12 months are: Telecommunications, Automotive, Technology, Power and Utilities and Mining and Minerals with most recording a medium level of convergence with the tech sector.

“A new and interesting nuance we also found is that when structuring deals, more than half the local respondees (52%) say that a key factor is to ensure a broader narrative that will engage all stakeholders, perhaps reflecting a growing focus on purpose and purpose-led transformation,” said Mr Larocca.

These record intentions to pursue M&A are supported by extremely strong confidence in the performance of the global economy, record-high stock market valuations and the strength of the global and local M&A markets.

Private Equity the big winner

Local executives expect Private Equity deal activity to be even stronger in the coming twelve months. In October 2017, dry powder levels in APAC PE had reached the record level of US$57.5bn and in Australia some US$7.7bn.

“PE is active and keen to do more deals in Australia. PE firms are successfully raising new funds, adding further capital to be invested.  Domestic PE has been very active in Australia and New Zealand in recent times are keen to deploy more capital into local businesses. Corporates are able to leverage PE to ensure they secure assets and enhance the agility of the business, and reduce competition at the same time,” said Mr Larocca.

“International PE firms are planning to add more APAC investments to their portfolios. We expect PE to be the biggest story in M&A next year.”

Australia Top Five for global investment

“Further good news for Australia is that we have surged from 8th place into 5th place globally as an investment destination. We are seen as a safe haven with strong regulation compared to other countries and an important beach head for Asian growth plans by many US, European and Middle Eastern corporates. That being said, locally executives are concerned about geopolitical and economic uncertainty. These concerns will need to be addressed if we are to maintain pride of place as an investment destination.”

The EY report is based on a global survey of more than 2650 senior executives across 43 countries, including 177 in Australia and New Zealand.

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