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Emphasis on strategic deals

Global Capital Confidence Barometer| UK highlights|16th edition

UK execs must adapt to a new era

 

The UK economy is experiencing relatively steady growth, and near-term UK economic forecasts have improved in the last six months. CCB16 reflects this, with 56% of UK respondents saying that they expected the domestic economy to improve — up from 4% in the last survey (CCB15), when the vast majority (87%) believed it would be stable.

Two-thirds of UK respondents also expect the global economy to improve, which mirrors the improvement in the UK’s primary export markets, especially the US and Europe. Although the overall economic outlook has improved, UK respondents have strongly divergent views when it comes to confidence in capital markets. UK equity valuations in particular have diverged, depending on companies’ exposure to the falling pound.

The percentage expecting improved UK equity market valuations has increased significantly in the last six months, from 8% to 25%. But the percentage expecting UK valuations to decrease has also risen dramatically from 5% to 27%. Views on domestic credit availability and short-term market volatility also show significant divergence.

Unsurprisingly, UK companies have a higher level of concern about “economic political instability in the EU” than their global peers. In CCB16, 12% of UK respondents chose this as one of their three risks for the next 6 to 12 months compared with 5% globally. But UK companies are still interpreting Brexit within the broader maelstrom of economic and political change.

The biggest economic risks for UK companies in the next 6 to 12 months include currency stability (15%), movement of labor (13%) and trade flows (13%). These are not exclusive to Brexit and equally fit within broader concerns about global policy-driven change alongside “increasing government intervention” (14%).

A greater emphasis on inorganic growth

UK companies are proactively adapting their capital and workforce strategies to changes in their markets at home and abroad. In the last six months, there has been an 11% fall in the number of UK respondents expecting their growth to come from organic sources in the coming year.

Instead, companies are putting greater emphasis on inorganic growth, especially joint venture and alliances, where almost a quarter of respondents expect growth compared with 13% just six months ago.

UK companies listed their main motivation for taking this route as opposed to traditional M&A as: “lower risk and capital investment than a full acquisition”. This suggests that some companies are seeking a more conservative approach to dealmaking in less certain times. Nevertheless, there is some work to do on diligence, where just 57% of UK companies have a formal process to evaluate and capture synergies compared with 74% of companies globally.

There is also evidence in the survey of UK companies changing their capital management strategies to boost returns in changing markets, including a stronger allocation of resources to strategic portfolio reviews and optimization of balance sheets compared with their global peers.

Meanwhile, domestic uncertainty has also focused UK companies’ minds on the size and location of their workforce. On balance, UK companies are looking to increase their overseas workforce and reduce the number of UK employees.

But most striking is the 62% of UK respondents who plan to sell or outsource routine operations in the next 12 months, compared with 49% in the global survey. Are UK companies thinking about rising costs and the cost and availability of workers in a post-Brexit labor market?

Engaging in the deal market

In CCB16, 51% of respondents signaled their intention to pursue M&A in the next 12 months – three percentage points more than CCB15, but slightly lagging the 56% global figure.

Most UK respondents still expect a stable level of deal activity, and almost half expect their pipeline to increase, up from 28% six months ago. However, 14% expect their pipeline to decrease, compared with 0% in the last survey – a further sign of divergence.

The survey highlights currency and geopolitical concerns elsewhere. The percentage of UK companies expecting the number of global M&A opportunities to improve fell from 79% to 37%. In addition, 39% expect a decline in global M&A opportunities when we had no such responses last time.

A weaker pound changes the valuation equation, and may limit and deter UK companies from bidding on overseas companies, while companies could be concerned by the increase in cross-border M&A protectionism. More UK respondents also expect to focus on smaller strategic deals of less than US$250m in value, which supports the idea that UK companies are focusing on making market-driven adjustments.

In line with their global peers, UK companies are primarily engaging in deals to access new markets, new geographies and new technologies. An increase in cross-border dealmaking to secure market access and supply chains tops the list of UK and global M&A themes for the next 12 months, which underlines universal trade concerns. New talent is also high on the list of UK priorities, a further reminder of labor market concerns.

UK companies realign strategy to changing dynamics

The UK remains a top destination for UK companies to do deals, but is also third on the global destination list — a measure of its continuing attractiveness.

The UK has maintained its attractiveness for deals and investment – 23% of global companies say clarity on Brexit has increased their chances of investing in the UK. But 29% of global and 38% of domestic respondents say the likelihood of their investing in the UK has fallen. The UK will need to work hard to maintain its position.

EY - Steve Ivermee

Steve Ivermee

EY UK&I Leader

Transaction Advisory Services

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Download UK highlights (PDF) Press release: Cautious UK companies turn to deals to drive growth

Summary videos

Organic or inorganic growth?

UK bounces back to rank third most attractive investment destination

UK companies expect steady economic growth amid increased risk