3 minute read 9 Nov 2018
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Eurozone executives optimistic about M&A despite local concerns

By

Andrea Guerzoni

EY EMEIA Transaction Advisory Services Leader

Advising Boards and CEOs on transformational deals from strategy through to execution. Leader of the EY EMEIA Transaction Advisory Service line. Innovator and team player.

3 minute read 9 Nov 2018

Eurozone companies are looking to the future for accelerated growth in M&A but attentive to present complexities.

This article is part of our M&A report Global Capital Confidence Barometer, 2nd half 2018.

Our latest Global Capital Confidence Barometer finds Eurozone companies looking to grow their businesses even as they negotiate increasing concerns outside their control.

The survey of over 450 executives in the area shows they are confident of growth in the near term, albeit with a slightly less positive view on Eurozone growth compared with global growth (84% see the global economy improving vs. 68% for Eurozone growth). However, across all metrics — economic, corporate and capital markets — executives signal no imminent severe downturn.

Eurozone executives are confident of growth in the near term

68%

see the local economy improving, vs. 84% for the global economy.

Where we do see a more positive attitude by Eurozone executives is around securing future growth opportunities. They are more focused on investing in existing operations (30% for Eurozone vs. 27% at the global level). They are also more likely to pursue acquisitions than their global peers. More than half (53% vs. 46%) look to be actively buying assets. And the reasons given for pursuing acquisitions are interesting. Executives are looking to access new markets (25%) or responding to changing customer behavior (24%).

Eurozone executives are confident of growth in the near term

53%

expect to actively pursue M&A in the next 12 months, down 4% from a year ago, but more than the 46% globally who expect to deal.

It is the emerging risks concerning regulatory, geopolitical and policy uncertainty that Eurozone executives see as a major threat to their core business (28%) and the biggest risk to dealmaking (45%). It is no surprise then that a quarter are looking to mitigate the impact of trade and tariffs (16%) or to secure supply chains (11%) through M&A.

This pragmatism by Eurozone executives is corroborated by their choice of an investment destination for deals. While the area’s four big economies (Germany, France, Italy and Spain) make the top five, it is the UK in second place that shows Eurozone companies are on the forefront regarding this disruption.

There is also a keen focus on their portfolio robustness and resilience. Two-thirds of Eurozone executives (66%) now review their portfolios more frequently than once a year. They also review the strategic and financial criteria for their existing businesses to reflect changes in economic outlook, capital costs and industry dynamics more often. And they are generally looking to divest assets that are underperforming or at risk of digital disruption (71%).

Brexit is a potential headwind for many Eurozone executives. What they are most keen to see from the negotiations between the UK and EU is a familiar landscape in which to operate. Existing frameworks such as Switzerland, Norway and Canada are attractive options. What they do not want is further uncertainty. A second referendum that may keep the UK in the EU is favored by just 5% of Eurozone executives, which is the same percentage as those who would prefer a trading relationship based on WTO rules.

ccb19 eurozone brexit chart

*The Norway model — the European Economic Area option: access to single market for most goods and services; power to strike free-trade deals; UK must accept free movement of people and make EU contributions

The Switzerland model — the Economic Free-Trade Agreement option: bilateral agreement with EU affording UK select access to single market for goods but not services; UK must accept free movement of people and make specific EU contributions

The Canada and Japan model — the Free-Trade Agreement option: tariff-free access for most goods — services not necessarily included — but custom controls in place; UK does not need to accept free movement of people

The UK White Paper option — UK part of a free-trade area for goods but different rules for services; shared EU-UK customs border but with right to diverge on tariffs and strike own FTAs; free movement of people to be replaced by a mobility scheme with preferential access for EU citizens

Revert to WTO rules — acceptance of EU tariffs on goods exported to single market; UK halts EU contributions and free movement of people

A second referendum in the UK — Article 50 to be halted

Summary

While complexities exist that challenge current business models, strategies and dealmaking plans, Eurozone executives are firmly looking to the future while building resilience in their current operations. This pragmatism should see a pickup in deals in the area and underpin growth in the years to come. Download the full report (pdf).

About this article

By

Andrea Guerzoni

EY EMEIA Transaction Advisory Services Leader

Advising Boards and CEOs on transformational deals from strategy through to execution. Leader of the EY EMEIA Transaction Advisory Service line. Innovator and team player.