- 46% of global executives plan to acquire in the next 12 months — lowest appetite in four years
- Some executives opt to pause M&A due to regulatory, trade and tariff uncertainty such as Brexit — but UK is number two investment destination of choice
- 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), 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. 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, 46% of respondents cite regulation and political uncertainty as the biggest potential risk to dealmaking in the next 12 months. Only 46% are now planning to acquire in the next 12 months — down from 56% a year ago.
However, M&A imperatives and macroeconomic fundamentals remain robust, with 90% of respondents expecting the global M&A market to improve and 9% expecting it to remain stable in the next 12 months. The majority of executives (85%) believe global economic growth prospects are improving, with only 2% predicting short-term market stability to decline and 2% predicting equity valuations to deteriorate.
Steve Krouskos, EY Global Vice Chair – 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. Fundamentals and the strategic rationale for deals remain strong, and the appetite to acquire will likely grow toward the second half of 2019.”
Brexit negotiations top of mind for executives
The outcome of Brexit negotiations is a focus for all 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. Just 5% of executives globally prefer a second referendum of the UK’s EU membership — and only slightly more (6%) favor a World Trade Organization rules-based outcome.
The CCB also highlights the impact of Brexit in relation to financial services. Forty-three percent of all 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 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 two destination of M&A choice for executives globally, up from the fifth position in the April 2018 survey. Overall, the top five investment destinations for executives surveyed are the US, the UK, Canada, Germany and France.
Krouskos says: “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.”
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 executives (40%) are reviewing their portfolios every six months compared with a half a year ago (27%). Companies from Japan (62%) and China (61%) cite this frequency more than other countries’ respondents. Just 33% of companies review their portfolios once a year or less, compared with 64% six months ago, with most of those respondents based in the US (58%) and the UK (43%).
Private equity dealmaking intentions not so private
As a result of portfolio reviews, nearly three-quarters of companies (73%) 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 31% of executives citing PE as a major acquirer in the next year. Sixty-eight percent believe that the biggest competition they face for assets will come from private capital, including PE and corporate investment funds.
Krouskos 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.
“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.”
View the survey online at ey.com/ccb and follow us on Twitter: @EY_StrategyTran | #EYCCB
Notes to Editors
EY is a global leader in assurance, tax, strategy and transactions and consulting services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.
EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. Information about how EY collects and uses personal data and a description of the rights individuals have under data protection legislation are available via ey.com/privacy. For more information about our organization, please visit ey.com.
This news release has been issued by EYGM Limited, a member of the global EY organization that also does not provide any services to clients.
About EY Strategy and Transactions
EY Strategy and Transactions teams work with clients to navigate complexity by helping them to reimagine their eco-systems, reshape their portfolios and reinvent themselves for a better future. With global connectivity and scale, EY Strategy and Transactions teams help clients drive corporate, capital, transaction and turnaround strategies through to execution, supporting fast-track value creation in all types of market environments. EY Strategy and Transactions teams help support the flow of capital across borders and help bring new products and innovation to market. In doing so, EY Strategy and Transactions teams help clients to build a better working world by fostering long-term value.
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