Manufacturing and industrial leaders are increasingly optimistic about their financial prospects and show more M&A confidence, with more than half planning to increase their deal activity in the next year, research by Deloitte shows. The research also shows that while the main driver continues to be the achievement of economies of scale, less companies show appetite to use M&A’s to expand into emerging markets.
Professional services firm Deloitte recently released the results of its biannual summary ‘UK Manufacturing and Industrials M&A Predictions’. The predictions, which cover the views of UK and European CEOs, CFOs and M&A Directors in the sector, show that on the back of increased financial optimism, M&A confidence in the sector is on the rise.
Of the people surveyed, as much as 83% are optimistic about their financial prospects, with 74% feeling optimistic and 9% very optimistic, which is a boost in confidence from the last survey. In autumn 2014, half of respondents felt optimistic, with none feeling very optimistic.
The research shows that around 80% of companies are looking for acquisitions, with almost 60% planning to increase their deal activity in the next 12 months. This is down from the 73% planning to do so last year, but up from the 56% in late 2014. While the number of companies expecting more M&A activity increased, from 50% in autumn 2014 to 56% now, the number of companies expecting to significantly increase their activity decreased from 6% to 3%.
A shift is seen in the drivers of M&A activity, although the main driver continues to be ‘consolidation to achieve economies of scale’, which first emerged as the main driver in autumn last year. The acquisition of additional market share and cash rich corporate acquirers are also key drivers for M&A in spring 2015. The results show that less M&A’s are now driven by portfolio rationalisation (one of the main drivers of autumn 2014) and expansions into emerging markets (number one reason for M&A in spring 2014).
The decreased appetite to use M&A to expand into emerging markets is also seen in the source of target businesses. While emerging markets were a number one target last year, together with competitors, this year, companies prefer to target private equity owned businesses. According to Deloitte, distressed companies are an area of focus as their popularity as target business has increased from 6% in spring 2014 and 0% in autumn 2014 to 23% now.
Sources of finance
To finance the increased M&A appetite, companies prefer to use traditional bank debts, cited by 77% of respondents. This is up from the 69% in the latest survey and the 56% in last year’s survey. The number two preferred way to finance M&A’s is through balance sheet purchases, chosen by 60%, which was the most popular option in 2014 (88%).
Commenting on the results, Duncan Johnston, UK Corporate Finance Manufacturing Industry Leader at Deloitte, says: “The responses tell us a great deal about the current economic climate for UK and European manufacturing and industrial companies. We are seeing a continuing improvement in sentiment, both regarding the financial prospects for the sector, and for M&A activity. Looking to the second half of 2015, we expect the manufacturing and industrials sector will see an uptick in M&A volumes in the market. Driven by a strong sector performance, improving confidence and the continued good availability of finance, we expect deal activity to increase and valuations for quality assets to hold up, over the remainder of the year.”