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Optimism reigns as Brazil embraces dealmaking

Global Capital Confidence Barometer | Brazil highlights | 15th edition

Better economic outlook buoys dealmaking hopes in Brazil.

Following a period of profound political instability in their homeland, Brazilian executives are feeling overwhelmingly positive about the domestic economy and the M&A market as they head into 2017, according to the 15th Capital Confidence Barometer.

For almost one-third of respondents, political uncertainty at home remains a significant risk to both their core business and M&A strategy. Yet they feel far more positive that the Brazilian economy is improving (31% vs. 3% six months ago). This optimism is echoed in their sentiment on market fundamentals: compared with six months ago, double the number (or more) of executives feel positive about corporate earnings, short-term market stability, equity valuations and credit availability. With the political distraction of the last year now behind them, executives expect the government to turn to reforms that will reduce inflation, blunt the impact of foreign currency fluctuations and set the Brazilian economy back on a path to growth.

Regulation and convergence

In addition to the economic distractions of the volatile political landscape, industry regulation is cited by a quarter of Brazilian executives as the great disruptor over the next 12 months. Incumbent players in highly regulated core sectors — such as health care and infrastructure — are grappling with new entrants from adjacent sectors that may not be subject to the same regulatory standards. This has spurred the Brazilian Government to consider new tools to level the playing field.

Sector convergence is also placing pressure on the corporate landscape, compelling businesses to realign their value chains either vertically or horizontally through transformative mergers and acquisitions. For Brazilian executives, sector convergence was the second most important topic on the boardroom agenda, behind only the business model impact of digital technology. It should be noted, however, that despite considerable boardroom focus on dealmaking, 59% of Brazilian respondents said they see growth within the company coming from organic initiatives over the next year.

A more promising picture

On the whole, Brazilians are optimistic for an M&A rebound. Thanks to their buoyed optimism in the macroeconomic landscape, 63% of Brazilian executives say the domestic M&A market will improve over the next 12 months — a strong increase from only 11% saying this six months earlier. Brazilians are slightly more cautious at the global level, but overall 56% expect the global M&A market to improve.

Meanwhile, although deal expectations have dropped from near-record highs in the last 18 months, Brazilian executives’ appetite remains slightly above the historical average, with 42% of Brazilian executives anticipating they will pursue M&A in the next 12 months. Further, 73% of executives say they have five or more deals in their pipelines, and 27% (versus 5% six months ago) expect to complete more deals than they have in the past 12 months. These metrics, coupled with an improving macroeconomic picture as the country moves past the worst of its political upheaval, have set the stage for an M&A renaissance in Brazil as we head into 2017.

EY - Felipe Miglioli

Felipe Miglioli

Transaction Advisory Services

Ernst & Young Assessoria Empresarial Ltda.

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