M&A market buoyed by expansion strategies and innovation

21 November 2016 Consultancy.uk 5 min. read

Last year M&A activity hit almost $5 trillion in total deal value. This year so far, has been considerably more subdued, on the back of geopolitical and market uncertainties, among others. A new report finds that executives are again eyeing deals, with almost 50% of respondents citing more than 5 potential deals in their pipeline. M&A activity continues to be driven by the need to expand operations, pick up innovation and enter new business areas and geographies.

M&A activity globally has been glowing in recent years, favoured by strong market fundamentals, such as access to low cost capital, low organic growth opportunities, and access to new markets, among others. 2016 has so far been relatively slow, with analysts suggesting that key political uncertainties, including Brexit and the US Presidential election, as well as market uncertainties, including China’s slowdown, are affecting sentiment. 

In a new report from EY, titled ‘Global Capital Confidence Barometer’, the accounting and consultancy firm considers how the current market sentiment, among others, impacts M&A activity. The study involved 1,700 CEOs, CFOs and other C-level executives from 18 sectors. 

Level of confidence

In terms of a number of key market metrics, a mixed bag of sentiments are revealed by the study. Sentiment around corporate earnings is improving, up from 41% saying that the figures are improving in April to 54% in the latest report. Respondents are still less enthusiastic than last year, when 70% said that they were confident earnings would improve. Respondents are also more upbeat about short-term market stability than in April, with 51% saying conditions are improving on 47% in April. Again, last year, respondents were considerably more positive, at 71%. 

Respondents are a little less positive about debt markets, with fewer respondents saying that equity valuations are improving, at 31% vs 39% in April, while credit availability remains relatively stagnant, although the market is seeing considerably less improvement than the same period last year.

Disrupting core business in the next 12 months

Respondents were also asked how they expect their businesses to be affected by current market trends. The biggest concern cited is ‘sector convergence/increased competition from companies in other sectors’, cited by 23% of respondents. 20% respondents cited ‘product innovation’ as likely to disrupt their businesses, while ‘increasing regulations’ are expected to disrupt around 18% of respondents’ operations. ‘Increasing globalisation’ and ‘changing consumer behaviour and expectations’ both come in as sources of potential disruption at 15% of respondents each. 

Actively pursuing M&A

The respondents suggest that they expect M&A activity to pick up, with 57% saying that they are expecting to pursue an M&A deal in the next 12 months. This is up from 50% in April’s report, and in line with last year’s results of 59% and 56% in October and April respectively. The results remain above the long-term average of 42%. 

Deals in pipeline

While 2016 has been slow, 2017 looks to see considerable improvement, with 49% of respondents saying that they have five of more deals currently in their pipeline, up from 20% in April and 12% last year. The survey further found that there is little change in the expectation from respondents about change to deals in their pipeline – 65% cited no change, while 26% say that their pipeline is set to decrease by 9%. 

Drivers for M&A

When asked about the strategic drivers affecting respondents’ decision to pursue an acquisition within their current sector, ‘growing market share’ came out on top with 23% of respondents, followed by ‘acquiring technology or new product capabilities’, at 20%. Around 17% of respondents used M&A to pick up innovative startups, while a 17% use it as part of their strategy to expand into new geographies. Acquiring talent was cited by 15% of respondents.

Respondents are also leveraging M&A to access companies, and capabilities, outside their own sector. The biggest reasons, cited by respondents as strategic drivers for acquisitions outside their own sector, are ‘reacting to competition’, cited by 19%, access to ‘differentiated customers, details or databases’, cited by 19%, and ‘new product or service innovation’, also cited by 19% of respondents. 

The firm notes that it is not merely M&A, but a wider range of alliances, partnerships and collaborations, which are opening up cross-border and industry specific engagement, as incumbents find new ways to compete in a change markets. Steve Krouskos, EY Global Vice Chair of Transaction Advisory Services, explains, “Industrial mash-ups – through acquisitions and alliances – are being driven by new market entrants upsetting the status quo. These disruptors are changing the competitive landscape with new operating models and new ways of creating demand.”