Large firms have means, but lack of motivation
Bearish sentiments permeate the global mergers and acquisitions (M&A) market as Ernst & Young’s latest Capital Confidence Barometer shows that less than a third of respondents are expected to pursue an acquisition in the next 12 months.
In contrast, the number of businesses looking to sell assets has risen to 31 percent from 26 percent in October 2011.
In terms of acquisitions, companies in such sectors as financial services, life sciences, oil and gas, technology and consumer products said they were more likely to do deals. Metals and mining, automotive and power and utilities companies are less positive in their M&A outlook.
Companies headquartered in India, the United Kingdom, the United States and Germany are among the most bullish, with their counterparts in Japan and Russia less so. When asked where they will do deals, China, India, the U.S., Brazil and Indonesia were the top five target markets.
``Caution, rather than confidence, is driving global M&A sentiment despite strong fundamentals for a pick-up in activity now being in place,’’ said Ernst & Young’s Global Vice-Chair for Transactions Advisory Services Pip McCrostie.
``With better access to credit and large cash piles, companies have the means and the methods to do deals but their motivation is tempered by concerns over the strength and permanence of the global economic recovery,’’ she added. ``Concerns over what they see in the short-term are also clouding the longer-term view on critical M&A matters such as valuations.’’
That gap between economic confidence and active corporate deal making is highlighted by current data showing that M&A volumes globally were down 22 percent in the first quarter of 2012 compared to in the same period last year.
A combination of stronger operating results, cost reduction programs and risk aversion has meant that large companies globally have accumulated large stockpiles of cash. Among those companies which say they either reengaged in M&A or are thinking about it, almost half say that they will use cash as their primary source of funding.
Debt saw a modest increase in popularity as means of deal funding due to low costs and an improved confidence by businesses in credit availability. The proportion of those that would use debt to finance an acquisition increased to 39 percent from 33 percent six months ago.
Divesting as core strategy
The overall conservative nature of the respondent’s attitudes towards M&A is reflected in their focus on creating value through organic growth, portfolio optimization and divestment. The proportion of companies planning to sell assets over the next 12 months has risen from 26 percent in October 2011 to 31 percent today.
McCrostie explains that companies are looking to focus on streamlining their operations and there is still a desire to grow their stock pile of cash. More companies are now looking inwardly, at managing their portfolios and non-core assets, rather than outwardly at potential buying opportunities.
``Divestment is especially pronounced in North America. Although we also expect it to grow across Europe and Japan in the coming months as companies look to re-position themselves as a result of the Eurozone crisis and ahead of what is hoped will be an improving economic environment,’’ she said.
Sectors most likely to pursue a divestment are oil and gas, life sciences, consumer products, mining and metals and power and utilities. Companies headquartered in Brazil, Japan, the United Kingdom, Germany and Canada are among the most inclined to sell assets.
Economic outlook brighter
There were clear signs from the survey that the upswing in economic confidence was feeding through into overall business confidence.
The proportion of those surveyed who thought that the global economic situation is improving has increased from 26 percent in October 2011 to 52 percent in April 2012. Only 20 percent remained pessimistic about the economy compared with 37 percent six months ago.
Among broader business confidence indicators, there were improvements in sentiment across the board with more positive figures for expected corporate earnings, employment growth, credit availability and the regulatory environment.
The only indicator where there was a decline was in the proportion of respondents who held a positive outlook for short-term stability, which dropped from 14 percent to 5 percent compared to October 2011.
Economic and business confidence has rebounded most strongly in the U.S. and parts of Europe including France and the UK. In contrast, confidence in the emerging markets although from a much higher base, has either stayed flat or declined, particularly in India.
McCrostie commented: ``However, with 86 percent of these global companies telling us that the ongoing Eurozone crisis has affected their business, the indications are that this could be a fragile recovery in confidence that will be difficult to sustain.’’
So what happens next? Despite the improvement in economic performance and modest upturn in business confidence, companies still remain extremely cautious in their outlook over the short term in particular.
McCrostie concludes: ``While the global recovery remains fragile, companies are unwilling to commit the time and resources to M&A and the defensive cash accumulation mindset will continue to be the norm. However, there could come a point when shareholders could exert pressure or governments might incentivize companies to do something with excess cash. If this happens we could see an increase in M&A activity.’’
This article was contributed by Ernst & Young, a leading global professional services firm.