Political uncertainty limits M&A expectations as companies focus on portfolio review
The political turmoil that led to the March resignation of President Pedro Kuczynski is prompting Peruvian companies to refocus on portfolio review and take a wait-and-see approach toward mergers and acquisitions, as shown by EY's latest M&A report, Global Capital Confidence Barometer. Only 44% of the Peruvian executives we surveyed expect their companies to actively pursue M&A in the next 12 months, down from 66% six months ago.
Our survey was conducted in the weeks leading up to the president's resignation, and the impact on corporate confidence is clear. Half of respondents cite political uncertainty as one of the greatest risks to near-term growth of their business, and 44% cite changes in trade policy and protectionism. While we have seen anecdotal evidence of a pickup in M&A since the resignation, it is still not clear how Congress will work with the new president amid the lack of a parliamentary majority. More positively, 68% of Peruvian respondents say they see the domestic economy improving.
Even as deal intentions have slowed, deal pipelines and closings are stable.
- Two-thirds of Peruvian companies do not see their M&A pipelines changing in the next 12 months, and 53% expect deal completions to increase during the same period; none did a year ago.
- Nearly 80% say they had either failed to complete or canceled a planned acquisition in the past year, with most citing disagreements over valuation or competition from another buyer.
- A large majority (93%) say they expect competition for assets to increase in the next 12 months, with two-thirds expecting it to come from corporate buyers.
- While only 33% expect competition for assets to come from private equity, some respondents (38%) see the return of PE to the acquisition markets as a major theme in the next 12 months.
As is perhaps appropriate while dealmaking activity slows, portfolio transformation is overwhelmingly the top board issue. More than three-quarters (76%) of Peruvian executives cite portfolio review as their boards' top concern over the next six months, and all respondents say their companies review their portfolios at least annually. More than half (55%) say they have identified underperforming assets or assets at risk of disruption to divest.
However, companies do not necessarily see quality acquisition targets coming to the market: 41% say a lack of high-quality assets is the biggest potential risk to dealmaking. This may be a major factor leading companies to look outside Peru for growth: one-third of our Peruvian respondents expect an increase in cross-border dealmaking to be a major M&A theme over the next 12 months.
To be sure, this survey represents a snapshot in time, taken at the height of the uncertainty surrounding Kuczynski's resignation. As the political noise fades, companies that have been postponing decisions should be ready to act, both divesting the assets they identify in their latest wave of portfolio review and making new acquisitions. Our survey results in six months' time will be a key indicator of Peru's post-Kuczynski business trajectory.