Corporates continue to explore M&A as part of growth strategy

11 June 2018 5 min. read

Geopolitical uncertainty, and recent market stutters, have done little to dent corporate optimism in earnings, credit availability, short-term market stability and equity valuations. Their optimism is reflected in continued divestment and acquisition interest, even while competition with private equity for targets heats up.

The equity markets started 2017 at a high, before falling sharply on the back of uncertainties, from bond levels reaching 3% in the US to the possibility of a trade war between the US and China. Meanwhile, geopolitical concerns have continued, with airstrikes in Syria and in the US, continued uncertainties around the incumbent Whitehouse administration remain, amid the threat of a trade war with China and the EU.

The markets have continued to post strong results however, while fundraising in the PE segment continued unabated. To understand the conditions affecting the market for companies and business units, EY has released its latest ‘Is your portfolio fit for the future or fashioned on the past?’ report into the industry. The report is based on figures from a survey of more than 2,500 executives in 43 countries.

Confidence level in key indicators

Overall respondents remain positive about the direction of the market, with 77% citing confidence that corporate earnings are improving, a 20% increase on the same period last year – none of the respondents expect decline. Credit availability is cited by 51% of respondents as likely to increase, while short-term market stability is cited by 50% of respondents to improve and 48% of respondents as stable.

A small decline was noted on the previous survey in October 2017 when it comes to equity valuations / stock market outlook, at 45% expecting an increase and 53% stability, vs. 51% an increase and 43% stability. According to the firm, the figures reflect the relative confidence of the market that the relatively good times are likely to continue for the near-term at least.

Greatest risks to near-term core business growth

The study found that political and geopolitical uncertainties continue to dominate the near-term risk to their business’ growth, at 48% and 43% of respondents respectively. The rise of protectionist rhetoric and populism noted as areas of particular concern to business outcomes. Although any concrete consequence is still to be seen, with Brexit talks still on going, Europe as a whole is facing a populist backlash as Austria, Italy and Hungary have all delivered anti-migrant, Eurosceptic governments in recent months.

There are other concerns on the horizon too, including changes in trade policies, and the impact of technologies, such as digital transformation, sector blurring and customer behaviour changes, on business outcomes (cited by 36% of respondents). Finally, currency movements – as rates change – are noted by 35% of respondents as an area of concern.

Portfolio review and objectives timeframes

According to the study, the majority of respondents said that they would engage in M&A activity in the coming 12 months, with firms continuing to streamline their portfolios in line with changing market conditions. The main action taken by respondents is an identification of asset at risk of disruption to divest, cited by 39%, while 32% said that they identified underperforming assets to divest. Most of the respondents said that they would move within a year on their discoveries.

The majority of companies (52%) also say that they will engage in M&A activity in the coming 12 months, down slightly on the same time last year (56%). A large cohort of respondents is expecting the market to improve over the coming 12 months (86%), up significantly from the same question posed last year, when 39% of respondents said that there would be a pickup over a 12 month period.

M&A themes next 12 months and major risks

While geopolitics dominates global headlines, the survey respondents note that in the M&A sphere, cross-border deal making and a return of PE as a major acquirer of assets – are highlighted by 30% of respondents apiece. With a smaller 10% noting cross-sector M&A in technology and digital as the main theme.

The major risks face by players seeking to acquire companies and bolt-ons, is a lack of quality targets as the number of players fishing in the same pond increases. High valuations are less of a concern, while access to funding is likely to remain sufficiently robust – cited by 10% as a concern.

Related: Management consulting drives M&A activity in professional services industry.