Japan M&A appetite strong despite geopolitical uncertainty

・73% of Japanese executives plan to acquire in the next 12 months
・87% expect the global M&A market to improve, up from 39% last year
・US tax reform not expected to impact global deal appetite in near term

Despite deal levels above their pre-financial crisis highs in 2007 ※1,  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, including 100 executives from Japan. Rising economic and corporate confidence and the drive for innovation and growth are outweighing geopolitical and regulatory concerns as 73% of Japanese companies respondents ※2 indicate that they plan to acquire in the next 12 months, while 52% of total respondents ※3 say so.  

Nearly half of executives expect the number of deals in their M&A pipeline to increase over the next 12 months. The number of executives expecting to complete more deals in the next year has more than doubled (58 % in April 2018 versus 26 % in April 2017, 67% versus 33% in global).

In addition, 87% of Japanese executives expect the global M&A market to grow further over the coming 12 months - a significant increase from last year (39%). And, 88% of executives predict increased competition for M&A assets in the next year, within 58% of those respondents citing private equity (PE) as the biggest competitor.

Vincent Smith, Representative Director, Chairman - EY Japan Strategy and Transactions, says:
"Rising confidence and the continued drive for digital is seeing deal pipelines and M&A appetite significantly increasing, and we expect this to remain strong for the foreseeable future. The private equity deal activity increase we saw in 2017 looks to be accelerating with significant reserves of capital yet to be deployed. Interestingly, while we can anticipate intense competition, we may also see more collaboration as private equity investors club together with corporates to do deals."

Strong dealmaking intentions are supported by positive macroeconomic and capital market factors. The majority of executives believe global economic growth is improving. 87% of respondents also believe corporate earnings are set to improve, while just 1% predict a decline in valuations. Similarly, only 1% see any potential for market stability to deteriorate. In contrast to current market sentiment among many commentators, the survey found that executives are looking at their own fundamentals and seeing a brighter outlook for capital markets.

Geopolitical and regulatory uncertainties are not deterring dealmaking prospects

Despite current geopolitical tensions, 87% of executives surveyed expect governments to increase infrastructure spending over the next 12 months, and almost two-thirds of those executives say that the increased government investment would support their own corporate growth.

However, executives also recognize that geopolitical uncertainty poses challenges, with more than half seeing it as a key risk. Disruptive forces including technology and digital transformation, and sector blurring and convergence were also seen as key risks that could hamper growth among 39% of respondents.

Smith says: "Current geopolitical uncertainty is undoubtedly front of mind for all CEOs. However, whatever trade agreements exist between countries, boards will need to ensure companies can continue trading assets across borders. The current growth imperative means companies will remain focused on accessing new markets or acquiring innovation as they look to transform their portfolios."

Portfolio transformation and the quest for digital skills driving deal activity

81% of 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. AI and robotic process automation (RPA) are most prominent for almost half of both Japanese companies and global companies※4 respondents' boards, followed by cloud computing and big data and blockchain.

As more companies adopt new technologies, more than half of executives indicate that they are struggling to hire people with the right skillsets and 82% cite talent acquisition as a main strategic driver for pursuing M&A.

Smith says: "Digital transformation is driving Japanese companies to adopt a laser focus on portfolio transformation. Opportunities offered by new technologies as well as the potential threats posed by digitally savvy competitors are now key factors in businesses' transformation plans."

Cross-border deals firmly on the agenda amid rising globalization

While identifying growing protectionism and geopolitical uncertainty as threats, executives are confident that these will not deter international dealmaking. 66% of Japanese executives plan cross-border M&A in the coming 12 months as access to new markets in different geographies continues to be a growth priority.

Japanese executives name Japan, China, Singapore, Malaysia and Thailand as the top five investment destinations of choice respectively.

While the US continues to top executives' investment destinations in the global result, both the US and global respondents do not believe that the US tax reform will significantly boost dealmaking - contrary to market sentiment. A small number expect to use any financial gains for inorganic growth or acquisitions, while proceeds from repatriation are expected to be invested in organic growth (77% of US respondents) or returned to shareholders (19%).

Smith says: "Taxation levels, in and of themselves, do not tend to drive dealmaking. They are part of a range of complex calculations that form part of the mechanics of a deal, but ultimately deals are always driven by strategic objectives. In today's environment of low interest rates, strong corporate earnings and elevated stock prices, the ability to fund deals does not appear to be an impediment to M&A."

In addition to cross border deals and PE's active acquisition, deals to drive further sector convergence

Following by increasing in cross-border deal making and PE's return, they see an increase in cross-industry acquisitions fueled by the need to adopt new technology and digital capabilities to be the hallmark of M&A in 2018.

In terms of the acquisition appetite of Japanese executives, the top five sectors are consumer products and retail, technology, automotive and transportation, industrials, financial services, media and entertainment. 

Executives will walk away from deals despite market highs

A strong deal appetite in an already heightened M&A market might raise speculation about the longevity of the current market. Yet despite rising competition for assets, there are no signs that the market is overheating, with executives indicating that they are prepared to pull-out of deals. 85% of executives say they have walked away from a deal in the past 12 months, and of those, more than half say it was due to competition from other buyers or disagreement on price/valuation.

Smith 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 dealmaking is now a cornerstone of M&A. Greater availability and transparency of data is allowing executives to make better informed investment decisions. Japanese executives will continue to look to M&A as a growth engine, but in contrast to the approach to acquisitions seen before the financial crisis, they are comfortable in walking away from transactions when the strategic value and sums do not add up."

Fig.1) Comparison with Japanese and Global result of 'the 18th EY Global Capital Confidence Barometer'.
Japanese companies: Companies which headquartered in Japan of all respondents.

View the survey online at ey.com/ccb and follow us on Twitter: @Japan_EY | #EYCCB

※1：8,281 deals worth a combined US$1.02t | Source: EY analysis and Dealogic
※2：A company which has the headquarters in Japan, and operate the businesses globally
※3：All the respondents including Japanese companies
※4：A company which operates the businesses in at least more than one country

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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

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