- 52% of global executives plan to acquire in the next 12 months
- 86% 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 18thEY Global Capital Confidence Barometer (CCB), a biannual survey of more than 2,500 executives across 43 countries
Rising economic and corporate confidence and the drive for innovation and growth are outweighing geopolitical and regulatory concerns as more than half of respondents (52%) indicate that they plan to acquire in the next 12 months.
Nearly two-thirds of executives (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).
In addition, an overwhelming majority of executives (86%) expect the global M&A market to grow further over the coming 12 months – a significant increase from last year (39%). And, more than three-quarters of executives (80%) predict increased competition for M&A assets in the next year, with most (68%) of those respondents citing private equity (PE) as the biggest competitor.
Steve Krouskos, EY Global Vice Chair – Strategy and Transactions, says:
“Rising confidence and the continued drive for digital is seeing deal pipelines and M&A appetite 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. 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 (73%) believe global economic growth is improving. Three-quarters (77%) of respondents also believe corporate earnings are set to improve, while just 2% predict a decline in valuations. Similarly, only 2% 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, a majority of executives surveyed (75%) expect governments to increase infrastructure spending over the next 12 months, and almost two-thirds (64%) 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 close to half (43%) seeing it as a key risk. Changes in policy and protectionism are also seen as risks that could hamper growth among more than a third of respondents (36%).
Krouskos 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
Almost three-quarters (70%) 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 (46%) of respondents’ boards, followed by cloud computing and big data (38%) and blockchain (15%).
As more companies adopt new technologies, more than half of executives (55%) 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.
Krouskos 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 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. More than three-quarters (81%) plan cross-border M&A in the coming 12 months as access to new markets in different geographies continues to be a growth priority.
Executives name the US, Brazil, Canada, China and the UK as the top five investment destinations of choice respectively.
While the US continues to top executives’ investment destinations, 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 (4%) 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%).
Krouskos 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.”
Deals to drive further sector convergence
As cross-border dealmaking has increasingly become the norm, cross-sector M&A is also becoming more commonplace. 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 acquisition appetite of executives, the top five sectors are oil and gas, telecommunications, automotive and transportation, consumer products and retail, and mining and metals.
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. Nearly three-quarters (73%) say they have walked away from a deal in the past 12 months, and of those, more than half (58%) say it was due to competition from other buyers or disagreement on price/valuation.
Krouskos 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. Executives will continue to look to M&A as a growth engine, but in contrast to the less-disciplined approach to acquisitions seen before the financial crisis, they are comfortable in walking away from transactions when the strategic sums do not add up.”
View the survey online at ey.com/ccb and follow us on Twitter: @EY_StrategyTran | #EYCCB
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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
(1) 8,281 deals worth a combined US$1.02t | Source: EY analysis and Dealogic