M&A appetite resilient amid geopolitical uncertainty

Wednesday, 7 November 2018

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  • A record 99% of executives predict the M&A market will remain strong
  • 74% say the economy is improving
  • 92% expect deal completion volumes to be the same or higher in the coming year
  • Integration and achieving synergies are key challenges when undertaking M&A

Geopolitical uncertainty is proving no hindrance to local executives as they have M&A firmly in their sights over the next 12 months. This is in contrast to many overseas executives who are hitting the pause button on their deal making intentions.

EY’s latest Australasian Capital Confidence Barometer – a bi-yearly litmus test on corporate sentiment – shows Australian and New Zealand executives expect the M&A cycle to continue at elevated levels.  A record 99% believe it will remain stable or improve and more than 92% expect the same or more deal completions in the next 12 months.

Despite leadership changes in both the Australia and New Zealand political landscapes, executives are feeling positive about the economy with a 9% increase – to a strong 72% - in the number who see it as improving. This is likely due to the strong pipeline of government supported infrastructure investment in both countries as well as increased private consumption, recovering business investment – especially in construction – and the continuation of low interest rate settings.

“Positive sentiment is fundamental to deal making”, says David Larocca, EY Oceania Managing Partner Transaction Advisory Services.  “There is a dichotomy in the survey, with more local respondents than ever before saying they are concerned about the implications of geopolitical uncertainty on business growth (32%) but nine in ten executives expect their M&A pipeline to either increase or stay the same in the coming year. Perhaps uncertainty is the new norm in deal-making, resulting in companies needing to balance growth ambitions with managing the risks on the horizon”.

Overseas, our survey has shown that that regulatory and trade policy uncertainty is giving executives pause for thought. There is a slight decline in the percentage that expect to make acquisitions in the next 12 months, trending down to 46% - the lowest point for four years.  

Access to new markets is a key driver for deal making and local companies have a strong cross-border focus as a result. They are more focused on cross-border transactions than their global counterparts (27% vs 23%) and therefore also more concerned about the impact of increasing protectionist barriers.

Achieving synergies is also becoming more of a challenge in the M&A world. Thirty-eight percent of respondents struggled to meet targeted synergies in their most recent deal. 

“Part of the answer to this”, says Larocca, “is to make post-deal integration a pre-deal consideration.  Acquiring companies will increase the likelihood of capturing synergies if they are mapped upfront and progress monitored. Business units need to be brought in much sooner to help develop synergy assessment and promote buy-in early, ideally during due diligence.”

Larocca also warns local executives not to underestimate the competition.  “With record levels of dry powder, we expect private equity (PE) and other sources of private capital to continue their rise as a major participant in M&A over the near term. Our survey is telling us that corporate executives should be prepared for increased competition for assets – or be open to collaborating with PE on deals, especially when parts of an asset may need to be divested to execute the deal.”

The EY report is based on a global survey of more than 2300 senior executives across 43 countries, including 121 in Australia and New Zealand.

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