Corporate M&A activity coexists with extreme market volatility

By Ernst & Young

Despite economic turbulence and market turmoil, four out of 10 leading international companies expect to make an acquisition in the next 12 months, shows Ernst & Young’s latest Capital Confidence Barometer bi-annual report based on a survey of more than 1,000 senior executives around the world including South Korea.

Surprisingly, that marks a slight increase on six months ago, in spite of the intense market turmoil during August, when the survey was conducted. This result is predicting a new paradigm: corporate M&A activity and extreme market volatility coexisting.

The fifth Capital Confidence Barometer, conducted together by the Economist Intelligence Unit (EIU), also finds that almost half of respondents are now focused on ``growth’’ in the next 12 months, with only 7 percent focusing on ``survival’’ ― the lowest number since the bi-annual report was first published in 2009.

Ernst & Young’s Global Vice Chair for Transaction Advisory Services Pip McCrostie says that the world’s leading companies are shrugging off continued market upheaval and focusing on growth and merger and acquisition (M&A).

``For them this is not 2008 all over again,’’ she says. ``They have spent the past three years reducing the financial risk on their balance sheet and taking tough efficiency measures needed to strengthen their positions, which helps them manage in volatile times.’’

Confidence amid uncertainty

Three years of focusing on capital management underpins the resilient attitude of those companies which might come to the deal table.

Large corporations are in much better shape than 2008. Balance sheets have been significantly strengthened. In addition, businesses have improved their capital structure by reducing interest costs and extending maturities. Overall debt has fallen, with 61 percent having debt-to-capital ratios of less than 25 percent and 78 percent plan to maintain or reduce their debt-to-capital ratios further in the next 12 months.

Corporate earnings outlook is relatively strong, with almost half (47 percent) confident they will be at least stable; a further third believe earnings potential is positive. Funding conditions have also improved, with 68 percent saying capital market conditions are at the very least stable.

Despite concerns over weakening global growth, many of the leading companies are surprisingly optimistic about their own national economy as well as the long-term global economic outlook.

Declining growth in the United States, coupled with the country’s credit downgrade, and the escalating sovereign debt crisis in the Eurozone sparked dramatic stock market activity at the time of the survey.

Despite this, two-thirds (63 percent) of respondents feel that the global economy is at least stable. Confidence was particularly high in sectors such as power and utilities, oil and gas and metals and mining.

Buoyed by confidence in local economies, McCrostie explained, many global corporations are now in a strong position to buy with de-risked balance sheets and large cash war chests.

``Based on the survey, we see a surprisingly favorable M&A environment with the majority of respondents positive about the number and quality of deal opportunities and the likelihood of closing them,’’ she added. ``A critical factor is the convergence of potential buyers and sellers around what they see as relatively reasonable and stable asset prices ― resulting in a significant increase in those looking to sell.”

Emerging markets targeted

Global leading companies are eyeing China, India, Brazil, the U.S. and Australia as the most attractive markets for investment according to the survey. For South Korean companies, the top five most attractive destinations for investment were China, India, Singapore, Malaysia and Indonesia.

Outside the recognized BRIC countries, Malaysia, Mexico and Argentina were the three most popular emerging market destinations for global companies’ investment. More than a third of the whole respondents said that their motivation for M&A was to gain share in a new market.

``Having an effective emerging market strategy is an absolute necessity for leading companies today,’’ said McCrostie. ``A balanced business portfolio needs to have an emerging market presence as well as mature market operations.’’

She added the Asian emerging markets are ``among the most attractive’’ as their high-growth potential is offering some protection against current volatility in mature markets.

In the meantime, a large majority of respondents (85 percent) expressed concerns that mounting regulatory pressures could potentially impede growth. Regulatory risk could de-rail growth plans ― particularly in the area of banking and financial reform, which could have a broad impact across sectors and geographies.

McCrostie concludes that regulation could be one potential hurdle and there is also the fundamental question of the economy. While the survey respondents’ M&A attitudes are remarkably robust given the current environment, she adds, a slump into a double dip global recession would mean all bets are off.

``However, for the time being, our respondents have learned to manage in volatility: they have the capability ― and ambition ― to do strategic deals in the current climate,’’ she said.

This article was contributed by Ernst & Young Korea.