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Deal intentions above historic levels

Global Capital Confidence Barometer | Brazil highlights | 17th edition

Our latest Capital Confidence Barometer finds Brazil at a pivotal crossroads for both its economy and dealmaking. Even as merger and acquisition plans decrease from record highs, Brazilian M&A is proving sturdy and stable as executives cautiously eye a domestic economic comeback.

After eight consecutive quarters of contraction, Brazil’s economy is on the rebound. Recent positive data releases for retail sales, manufacturing activity, industrial output and employment are boosting confidence. Accordingly, two-thirds of Brazilian executives say the local economy is improving.

However, this recovery remains fragile. Lower inflation and looser monetary policy should help sustain the economy, but uncertainty remains around the impact of the Brazilian Government’s structural reforms to social security, spending and tax rates — moves expected to reduce the country’s fiscal deficit and improve its credit profile but that may have adverse effects on the economy.

Add to this uncertainty the forthcoming general elections, and buyers could be expected to take a wait-and-see approach for the rest of the year.

A pause on dealmaking, but only temporarily

In fact, our survey already indicates a slowdown is underway: 62% of Brazilian executives say they intend to pursue mergers and acquisitions in the next 12 months, down 22 percentage points from six months ago.

That said, deal intentions continue to remain above historic averages, and this pause may turn out to be temporary. More than two-thirds (68%) of Brazilian executives say they expect the local M&A market to improve in the year ahead, with deal metrics including low interest rates and healthy deal pipelines likely to spur M&A activity.

Our survey also finds expectations for deal completions relatively high, with 42% of Brazilian executives anticipating closures to increase over the next 12 months. Like their global counterparts, Brazilian executives are focusing on more tactical deals as companies reshape their portfolios in response to disruptive market forces. Almost half indicate they are pursuing deals either to grow market share or to move into new geographies. In addition, cross-border dealmaking appears to be an emerging theme.

Although Brazilian acquirers’ first choice is their home country, they are also looking for assets across the Americas — the US, Canada and Argentina — and even abroad, with the UK rounding out Brazilians’ top five destinations.

Corporate venture capital to help future-proof businesses

As part of this effort to future-proof their businesses, Brazilians are increasingly looking to in-house corporate venture capital (CVC) investment vehicles. Well over half (58%) say they are investing in CVC, and nearly as many say they are devoting between 6% and 10% of their planned acquisition capital to CVC-type investments. A large majority (81%) of these companies are using these vehicles to gain access to new capabilities and technologies, or to accelerate their R&D and innovation efforts.

For now, we expect Brazilian companies to refocus on organic growth and portfolio optimization as they push the pause button on investments. Many are digesting their recent wave of acquisitions — 70% say they are focusing on existing operations and products — and a majority of executives tell us they are reviewing their portfolios every six months or more.

This careful tending of their operations should serve Brazilian businesses well next year, helping to free up capital for innovation and future M&A activity once the outcome of the Brazilian elections is known and the country’s economic rebound,

EY - Felipe Miglioli

Felipe Miglioli

Parthenon-EY | Strategy Services

Ernst & Young Assessoria
Empresarial Ltda.

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