Global M&A appetite dips to four-year low amid rising geopolitical uncertainty

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• 50% of Japanese executives(*1) plan to acquire in the next 12 months -- one of the lowest appetite in a number of years
• Whilst some global executives(*2) opt to pause M&A due to regulatory, trade and tariff uncertainty such as Brexit -- Japanese outbound investment remains a priority
• Longer-term deal market outlook robust; new sources of private capital fueling competition

Despite 2018 being on track to become a near-record year for the number of global mergers and acquisitions (M&A), global corporate acquisition appetite is at a four-year low. Deal plans are subdued in part due to increasing geopolitical concerns, according to the 19th EY Global Capital Confidence Barometer (CCB), a biannual survey of more than 2,600 executives across 45 countries, including 109 executives from Japan. With rising regulatory uncertainty, and ongoing trade and tariff negotiations -- including Brexit talks and the US-China trade disputes weighing-in on M&A sentiment, 53% of Japanese respondents cite regulation and political uncertainty as the biggest potential risk to dealmaking in the next 12 months. Only 50% are now planning to acquire in the next 12 months -- down from 73% half a year ago).

However, M&A imperatives and macroeconomic fundamentals remain robust, with 82% of Japanese respondents expecting the global M&A market to improve and 17% expecting it to remain stable in the next 12 months. The majority of Japanese executives 79% believe global economic growth prospects are improving, with only 2% predicting short-term market stability to decline and no deterioration in equity valuations.

Vincent Smith, Representative Director, Chairman - EY Japan Strategy and Transactions, says:

"Geopolitical, trade and tariff uncertainties have finally caused some dealmakers to hit the pause button. Despite stronger-than-anticipated first-half earnings and the undeniable strategic imperative for deals, we can expect this year to finish with much weaker M&A than how it started. The good news is that companies will likely take the break in action as an opportunity to focus on integrating the many deals undertaken over the past 12 months. This is likely to be just a pause, not a complete stop. In Japan the fundamentals and the strategic rationale for deals, both domestic and cross border, remain strong, and the appetite to acquire will likely grow toward the second half of 2019."

Portfolio optimization comes to the fore in response to uncertainties

The increasing risk of technological disruption, geopolitical uncertainties and ever-changing consumer preferences are prompting executives to review their portfolios more frequently. An increasing number of Japanese executives (62%) are reviewing their portfolios every six months compared with only 22% a half a year ago. Just 14% of Japanese companies review their portfolios once a year or less, compared with 73% six months ago.

Private equity dealmaking intentions not so private

As a result of portfolio reviews, nearly two-thirds (65%) of Japanese companies have identified assets to divest -- due to underperformance or risk of disruption -- indicating that other assets are coming to market and future buy-sell churn.

Some divestments could attract private equity (PE) buyers, with 22% of executives citing PE as a major acquirer in the next year. Eighty-two percent believe that the biggest competition they face for assets will come from private capital, including PE and corporate investment funds.

Smith says:

"The rise of private capital, including private equity, super funds, sovereign wealth funds and corporate venture capital, has fundamentally reshaped the funding environment and will help refresh M&A activity in the future. Fund managers are allocating more to private capital than ever before in the history of modern capital markets. Many will use private equity as a vehicle to deliver returns, while others will increase direct investing activity.

Brexit negotiations top of mind for executives

The outcome of Brexit negotiations is a focus for all global executives surveyed. Forty-one percent say that an Economic Free Trade Agreement similar to Switzerland's is their preferred outcome of UK-European Union (EU) discussions, followed by 22% preferring Canada's Free-Trade Agreement model.

The CCB also highlights the impact of Brexit in relation to financial services. Forty-three percent of all global respondents state they would be less likely to buy financial products and services from London-based providers when the UK leaves the EU.

Despite ongoing global trade and tariff uncertainty, many Japanese companies are still planning cross-border deals to mitigate the potential impact, with 20% of executives focusing more on international opportunities, including within the UK, which is the number three destination of M&A choice for executives in Japan. Overall, the top five investment destinations for executives surveyed are Japan, the US, the UK, China and India.

Smith says:

"The fundamental drivers for Japanese companies to complete cross border M&A remain. Further, many companies are looking to M&A to mitigate the potential impact of trade and tariff policies, secure market access and protect supply chains. All of the top M&A destinations of choice are countries embroiled in trade uncertainties, suggesting that those companies planning deals are actively looking to get ahead of potential geopolitical disruption." "Uncertainty is giving some executives pause for M&A thought -- and that will likely result in a fall from current deal highs in the next 12 months. However, we can expect higher M&A activity into next year. Portfolio reviews today will yield asset sales in due course. Getting ahead of technological disruption and navigating geopolitical shifts will require M&A. And with growing competition for assets among private equity and other private capital, those corporate executives who are opting to wait on the sidelines will likely find they are compelled to return to the deal table in 12-18 months' time."

*1) Executives belonging to a company which has the headquarters in Japan, and operate the businesses globally
*2) Executives belonging to a company which operates the businesses in at least more than one country. In this survey, all the respondents are applicable to this category.

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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 2,600 senior executives from large companies around the world and across industry sectors. This is the 19th biannual CCB in the series, which began in November 2009; respondents for the 19th edition were surveyed in August and September 2018. Respondents represented 14 sectors, 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