Deals take centre stage as companies look to M&A for growth in a permanently reshaped landscape

London, 17 October 2016

  • Share
EY - View the online version
 
EY - Download the PDF
  • More than half of respondents (57%) plan deals in next 12 months
  • M&A activity set to pick up in 2017 despite new uncertainties
  • UK falls as destination of choice as uncertainty complicates cross-border dealmaking

At a time of geopolitical uncertainty and rapid change, global mergers and acquisition (M&A) prospects remain very bullish, according to the EY 15th Global Capital Confidence Barometer (CCB), a survey of more than 1,700 executives in 45 countries. More than half (57%) of companies expect to actively pursue deals in the next 12 months — the second highest percentage recorded in the Barometer’s seven year history. More than 90% of executives expect the M&A market to improve or remain stable over the next year and less than 10% expect their own deal pipelines to contract over the same period.

In addition, joint ventures, alliances and other forms of minority investment are expected to supplement acquisitions and drive incremental growth.

Steve Krouskos, EY Global Vice Chair — Transaction Advisory Services, says:

“Everything is changing for global companies, except the expectations of their stakeholders around growth and returns — profitable growth is a mainstay demand of business. But turbo-charged technological advances and an unsettled geopolitical landscape have changed the M&A field of play forever. In this disruptive environment, the quickest route to innovation and growth is MA&A — mergers, acquisitions and alliances.”

Smaller targeted M&A on a new type of deal table

Megadeals remain a strategic option for firms, but the prevailing M&A trend is for smaller, smarter deals as companies cast a wider net and eye start-ups and fast-growth tech innovators. According to the Barometer, half (49%) of companies have on average more than five deals in progress and more than half are expecting to do deals between US$250m and US$1b. More than 90% of executives expect their deal pipelines to remain steady or increase over the next 12 months.

Krouskos adds: “With pipelines well-stocked, executives are opting for variety rather than plain vanilla in their deal intentions. They are screening a wider number of targets and doing more, smaller deals that extended their reach beyond traditional sector borders.”

Sector convergence continues as the industrial mash-up comes to the fore

Sector blurring and industrial mash-ups are an increasingly important part of the M&A landscape as companies make deeper inroads into adjacent or unrelated industries.

Findings showed companies’ most cited factor for cross-sector acquisition is reacting to competition (19%), followed by a desire to gain new customers (19%) and extend product offerings and services (19%).

“Industrial mash-ups — through acquisitions and alliances — are being driven by new market entrants upsetting the status quo. These disruptors are changing the competitive landscape with new operating models and new ways of creating demand,” says Krouskos.

Sectors with highest acquisition appetite are consumer products and retail (71% of companies planning a deal), diversified industrial products (60%), life sciences (56%), technology (54%), automotive (54%) and oil and gas (52%).

Geopolitical concerns and the rise of nationalism complicates cross-border investments

Geopolitical and macroeconomic issues in various forms — from currency fluctuations to declining trade flows — are an increasing concern for global executives the survey finds. This is fueling deal intentions as companies seek fast routes to growth in a low GDP environment. These issues also add complexity to international deals and for the first time in the Barometer’s seven-year history the UK is not among global executives’ top five investment destinations of choice.

“Brexit is a prominent example of the rise of geopolitical changes that are adding complexity to cross-border investments. In the longer term, we would expect the UK to bounce back as a top M&A destination of choice but the short-term uncertainty is giving investors pause for thought.”

Domestic M&A in China will be prominent in 2017 with US$160b spent of cross boarder investment so far this year.1 China will also continue to be a major outbound acquirer having already made investments in more than 50 countries in 2016. The US, China, Germany, Canada and France are the top five destinations for dealmaking.

Despite challenges, M&A set for uptick in 2017

Despite economic and geopolitical uncertainty, dealmaking intentions remain well above (57%) the Barometer’s long-term average (42%).

Krouskos says, “The current environment holds challenges for dealmakers — and some are new. As sector convergence increases, the integration of assets outside a company’s traditional core is far from straightforward. Also, a growing acceptance of a broader range of deal structures brings new complexity. Additionally, the rise of nationalist politics in a globalized business world requires new boardroom thinking around cross-border investment strategies.

“We cannot underestimate the fundamental changes in M&A. There is now an expanding menu of deal structure options. Data and analytics are enriching the reach and depth of deal evaluation. Deal integration has shifted from driving cost synergies to value creation, now starting with the customer and not the back office. Integrating dissimilar businesses creates the need for bespoke as opposed to off-the-shelf solutions.

“These factors have permanently reset the deal table. Despite the reset, the deal table will be full and we expect to see an uptick in M&A in the first half of 2017.”

View the report online at ey.com/ccb.

Follow us on Twitter: @EY_TAS #EYCCB


1 according to Dealogic and EY analysis.

-ends-

Notes to Editors

About EY
EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In doing so, we play a critical role in building a better working world for our people, for our clients and for our communities.

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.

This news release has been issued by EYGM Limited, a member of the global EY organization that also does not provide any services to clients.

About EY’s Transaction Advisory Services
How organizations manage their capital agenda today will define their competitive position tomorrow. Our more than 13,000-strong team across the globe works with our clients to help them make better and more informed decisions about how they strategically manage capital and transactions in a changing world. Whether you’re preserving, optimizing, raising or investing capital, EY’s Transaction Advisory Services bring together a unique combination of skills, insight and experience to deliver tailored advice attuned to your needs — helping you drive competitive advantage and increased shareholder returns through improved decision-making across all aspects of your capital agenda. EY’s Transaction Advisory Services was named the Accountancy Firm of the Year in Europe by Mergermarket in 2015, 2014, 2013, 2012 and 2010.

About EY’s Global Capital Confidence Barometer
The EY Global Capital Confidence Barometer is a biannual survey compiled by the Economist Intelligence Unit of more than 1,700 senior executives from large companies around the world and across industry sectors. This is the 15th semiannual Barometer in the series, which began in November 2009; respondents for the 15th edition were surveyed in August and September 2016, 50% were CEOs, CFOs and other C-level executives. Respondents represented 18 sectors, including financial services, consumer products and retail, technology, life sciences, automotive and transportation, oil and gas, power and utilities, mining and metals, diversified industrial products, and construction and real estate. The objective of the Barometer is to gauge corporate confidence in the global and domestic economic outlook, to understand boardroom priorities in the next 12 months, and to identify emerging capital practices that will distinguish those companies building competitive advantage as the global economy continues to evolve. ey.com/ccb #EYCCB