After a record year for the global M&A market in 2015, the outlook for the global M&A market continues to look rosy for the coming 12 months, according to research by EY among more than 1,700 executives of large organisations in 45 countries.
The survey, titled 'Global Capital Confidence Barometer 2016', reveals that almost all international directors surveyed have confidence in the development of the international market for mergers and acquisitions (M&A) in 2016. Of the surveyed executives only 5% expect a deterioration in the next 12 months. Last year, the M&A market had one of its best years ever – according to data from McKinsey & Company, the total M&A deal value stood at just under $5 trillion.
One of the drivers of the positive sentiment is the expectation that both the quality as well as quantity of M&A targets will remain at par. 42% of the surveyed executives believes that the economic conditions for closing a deal are healthy.
Moreover, half of the executives indicate that their business will be active on the M&A market this year. The share of large acquisitions is also expected to increase – more than 12% of international companies are considering a transaction in the coming year with a value of over $1 billion, this was, in the previous edition of the Barometer, only 3%.
The positive sentiment in the merger and acquisition landscape is further demonstrated by the stable development of the number of deals in the pipeline. Of the executives surveyed, 55% said that they are currently working on three or more transactions.
The difference between the valuations of buyers and sellers, the so-called ‘valuation gap’, is another area which reveals the solid foundation underlining the current M&A market. A majority of the international executives experience the valuation gap as relatively small (0-10%), although a large share of respondents forecast that this could possibly increase over the next 12 months due to the heating competition in the M&A market.
According to Stephan Lauers, Partner at EY’s Transaction Advisory Services, the positive sentiment on the M&A market, in particular, is being used by companies to divest non-core assets or less profitable activities. The divestment allows managers to free up capital for investment in technology and innovation. He also notes that there is increasing interest in forming partnerships, alliances and joint ventures, an approach which can speed up change transformations and agility. According to the M&A expert, alliances are being considered as a practical means to realise disruption, because cooperation enables faster, and more effective knowledge sharing, and support information innovation within wider value enhancing value chains. “An alliance comes with lower risk and enables companies to react quickly to a changing market,” says Lauers.