More than half (59%) of executives are looking to invest in acquisitions, up from 56% in April, a recent EY barometer of industry finds. According to the firm, this increased M&A appetite follows the stabilisation of business confidence among top companies. As these companies are looking to secure their long term growth, executives are starting to leverage capital towards inorganic growth opportunities, such as expanding through acquisitions.
Since 2009, EY releases a biannual report, titled ‘Capital Confidence Barometer Global’, which surveys 1,600 senior executives from large global companies about their global and domestic economic outlook. The report gives insight into boardroom priorities and emerging capital practices.
The H2 2015 report finds that 83% of executives continue to believe that the global economy is improving, although the number that believes there is decline has grown by 5% since April. Compared to a year earlier, the belief in improvement is up 30%. In terms of possible risks to improvement, the highest level of concern stems from increased global and regional political instability at 29%, followed by increases in currency and commodity volatility at 24%. Euro zone economic concerns come in at number three (23%).
Since the financial crises, boards have tended to focus on share buybacks and other short-term measures, in many cases under pressure from large or institutional investors. In recent years, executives have returned to the adage that focus on short-term tactics can be at odds with building long-term value, and in a time of modest global economic growth, executives are taking extra care to balance their allocations to support long-term strategic goals. The availability of capital mixed with board desire to diversify strategies for long term growth has seen companies equally prioritise cost cutting, organic growth and inorganic growth.
Pip McCrostie, EY’s Global Vice-Chair of Transaction Advisory Services, explains: “With modest increases in global GDP, organic growth alone is not enough for companies to expand and reshape at the pace they need. Technology and changing consumer preferences are disrupting business models and blurring sector boundaries. In that context, the search for growth is lifting deal-making to record highs – and executives are focusing on M&A to secure innovation, competitive advantage and market share for the foreseeable future.”
The main observation the report made is that M&A appetite is running high among executives surveyed. 59% of the companies taking part are planning an acquisition in the coming 12 months – pushing appetite to their highest level in the six year history of the report. The appetite for deals is up slightly from April when it stood at 56%, and up considerably from 40% and 31% in October and April 2014 respectively. Not every market is the same however. Particularly oil and gas at 69%, consumer products and retail at 67%, mining and metals at 67%, and diversified industrial products at 66% are considerably optimistic about doing deals.
Not only is the appetite for deals on the increase, but the belief in the likelihood of closing deals is also up over the previous year, standing at 57%, from 37% in April and 44% in October last year. This may be partly due to the belief of 69% of executives that there are considerably more quality acquisitions on the market, a number up from 46% in April. Choice has also increased, resulting in a confidence in the number of acquisition opportunities of 76%, 10% higher than in April.
Future market expectations
The M&A market is expected to improve further according to 83% of executives, while 15% note that they expect it to remain stable. The trend is considerably higher than last year when only 60% expected the market to strengthen further, and 39% expected it to remain stable. A number of factors are playing on the prediction of executives, EY finds. Particularly the disruption of business models, the blurring of sector boundaries and the drive towards sector consolidation in search of growth are all combining to lift deal-making at or above record highs.
The majority (71%) of deals that companies enter into are less than $250 million in value. Deals worth $251 million-1 billion now make up 5% more of the total share compared to April and 12% more compared to October last year. Mega deals, those above $1 billion, have increased 1%.
Cyber security concerns
One factor the report highlights is that cyber-security concerns surrounding acquisitions have been pushed high up on board considerations about possible acquisition deals. 20% of executives see cyber-security as a significant risk, to their deal process. For more than half (56%) of companies, cyber-security due diligence has now become standard practice. Areas of concern relate not merely to the companies themselves, but also to include business relationships such as customers and vendors, as well as joint ventures and affiliates of the target company.
In conclusion, McCrostie says: “With all signs in the deal market pointing upwards, some question the trend and wonder if the market is overheating, however, executives are acting prudently as they look for growth. They are conducting more thorough due diligence and are prepared to walk away from transactions that do not meet their strategic goals. In short, M&A is becoming an essential tool for generating long-term value. It’s a critical part of a sustainable strategy to build the next decade’s platform for growth.”