M&A appetite remains healthy despite political uncertainty
Wednesday, 30 May 2018
- 67% of executives expect to complete more deals
- Record confidence in economic conditions – infrastructure a key driver
- Private equity will continue to take a bigger role in transaction activity
The global appetite for mergers and acquisitions (M&A) shows no sign of waning, according to the 18th EY Global Capital Confidence Barometer (CCB), a biannual survey of more than 2,500 executives across 43 countries. Locally, despite 74% of respondents being concerned about political stability (double the number from 6 months ago) there is still optimism in both the local and global economies. Around the world, executives are bullish on the state of the global economy with the CCB’s macro-indicators the strongest they have been since the 2008 global financial crisis. One hundred per cent of Australian and New Zealand executives surveyed thought the state of the global economy was stable or improving.
Local confidence in M&A markets also continues to improve with eight out of ten Australian and New Zealand executives expecting local and global M&A markets to improve. These conditions will underpin sustained activity.
“This survey tells us that we are going to continue to see strong M&A activity,” says David Larocca EY Oceania Leader Transaction Advisory Services. “Almost half of our respondents believe the biggest risk to their growth plans will be a lack of high quality assets.”
“Private Equity (PE) will continue to play a bigger role in competition for assets,” says Larocca. “As the hunt for high quality assets heats up PE looks set to deploy record dry powder. PE firms also have the flexibility to hold portfolio companies for longer and can wait out the cycle if conditions deteriorate.”
Nearly two-thirds of executives globally (61%) expect the number of deals in their M&A pipeline to increase over the next 12 months – up from 36% in April 2017. The number of executives expecting to complete more deals in the next year has more than doubled (67% in April 2018 versus 33% in April 2017).
Strong expectations of infrastructure spending
With such confidence in both local and global economies expressed by our respondents, this naturally has been reflected in their expectations of strong infrastructure spending. The recent activity and announcements regarding infrastructure spending by governments in both Australia and New Zealand supporting this confident outlook. Executives anticipate this investment will have a multiplier effect on GDP, corporate growth and are hoping for new ‘city shaping’ infrastructure including improved transport and social services.
However political uncertainty is seen as the leading risk to business growth – a finding that has doubled in the last six months. “This is not all that surprising given the relatively new government in New Zealand and ongoing political uncertainty in Australia,” says Larocca. More broadly, executives are also concerned about geopolitical tensions and changes in trade policy and protectionism.”
Cross-border deals firmly on the agenda amid rising globalisation
While local executives fear greater protectionist actions by governments, executives still expect cross-border M&A to be a major theme in the next 12 months, with 36% citing it as the main theme – double the number from 6 months ago.
Larocca says, “For many companies, dealing in a globalised market is a necessity. Technology is connecting companies with customers across the globe and growth plans are no longer country centric.”
Portfolio transformation and the quest for digital skills driving deal activity
Eighty-two percent of local respondents see portfolio transformation as the top priority on the boardroom agenda, as companies look to remain agile, alert to new opportunities and need to quickly respond to a fast-moving market environment.
Companies are increasingly using data analytics and artificial intelligence (AI) to make better informed decisions about their portfolios. Cloud computing and big data are most prominent (47%) followed by AI and robotic process automation (42%) and blockchain (11%).
As more companies adopt new technologies, forty-two percent of executives indicate that they are struggling to hire people with the right skillset and 67% cite talent acquisition as a main strategic driver for pursuing M&A. How best to utilise a contingent workforce is a new and dominant issue for local executives, with 81% citing it as their dominant workforce issue. Flexible workforce models while increasing in popularity bring with them inherent financial and reputational risks and must be carefully managed.
Larocca says, “Digital transformation is driving companies to adopt a laser focus on portfolio transformation. Opportunities offered by new technologies as well as the potential threats posed by savvy competitors are now key factors in businesses’ transformation plans.”
Deals to drive further sector convergence
As cross-border dealmaking has increasingly become the norm, so too has cross-sector M&A. Almost a fifth (18%) of global executives see an increase in cross-industry acquisitions to be the hallmark of M&A in 2018 – fueled by the need to adopt new technology and digital capabilities.
In terms of the acquisition appetite of executives, the top five sectors are oil and gas, telecommunications, automotive and transportation, consumer products and retail, and mining and metals.
Larocca says, “Whereas the global M&A market highs of 2000 and 2007 were followed by falls, we are optimistic about the sustainability of the current M&A market – supported by our latest findings. Disciplined deal making is now a cornerstone of M&A. Greater availability and transparency of data is allowing executives to make better informed investment decisions. Executives will continue to look to M&A as a growth engine, but perhaps in contrast to some situations we observed before the financial crisis, they are comfortable in walking away from transactions when the strategic sums do not add up.”
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Notes to Editors
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About EY Global Capital Confidence Barometer
EY Global Capital Confidence Barometer is a biannual survey compiled by Euromoney Institutional Investor Thought Leadership of more than 2,500 senior executives from large companies around the world and across industry sectors. This is the 18th biannual CCB in the series, which began in November 2009; respondents for the 18th edition were surveyed in March and April 2018. Respondents represented 14 industries, 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 Global Capital Confidence 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