Business confidence among major companies has stabilised despite China’s slowing economic growth, with a greater appetite for merger and acquisition (M&A) deals, according to an Ernst & Young (EY) survey.
The firm’s latest Global Capital Confidence Barometer shows that more than 59% of executives are looking to invest in acquisitions, up from 56% in April. Both figures are the highest yet for the six years in which the bi-annual Barometer has been compiled and significantly more than for the 2014 Barometer, which respectively stood at 40% in October and only 31% in April.
This may partly reflect the belief of 69% of executives, that there are considerably more quality acquisitions on the market, against 46% last April. Choice has also increased, resulting in confidence in the number of acquisition opportunities rising to 76%; 10% higher than in April.
The sectors that were most optimistic about completing M&A deals were oil and gas at 69%, consumer products and retail (67%), mining and metals (also 67%) and diversified industrial products at 66%.
Responses to the latest survey also show 83% of company executives expect that global deal activity is set to increase and 42% confirm that they were “aggressively focusing on growth”. Forty-eight percent said that they are planning cross-sector deals to help consolidate and strengthen their competitive advantage.
Compared to a year earlier, the number who believe that global economic conditions are improving is up by 30%, although there is also a 5% rise in those who believe they are deteriorating.
When asked what posed the greatest risks to improvement, the highest level of concern arose from increased global and regional political instability at 29%, with increases in currency and commodity volatility at 24% followed by eurozone economic concerns at 23%.
Not only is the appetite for deals increasing, but confidence in the likelihood of closing deals is also improved, standing at 57% from 37% in April and 44% in October 2014.
“With modest increases in global gross domestic product [GDP], organic growth alone is not enough for companies to expand and reshape at the pace they need,” comments Pip McRostie, EY’s global vice-chair of transaction advisory services.
“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.”
Expectations and concerns
Five out of six executives now expect the M&A market to improve further, while 15% think it will remain stable. The October 2014 Barometer found that 60% expected the market to strengthen further and 39% thought it would be stable. EY suggests that 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 to record highs.
Nearly three quarters (71%) of deals that companies enter into are less than US$250m in value. Deals worth US$251m-US$1bn make up 5% more of the total share compared to April and 12% more than October 2014, while US$1bn-plus mega deals have increased by 1%.
The latest Barometer also finds that cyber-security concerns surrounding acquisitions have become a major issue surrounding possible deals and 20% of executives regard cybersecurity as a significant risk to their deal process. For 56% of companies, cybersecurity due diligence has 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.
“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,” says McCrostie.
“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.”
The world’s second-biggest economy will grow faster than previously predicted over the next four years, but the rate is unsustainable unless China addresses the problem says the International Monetary Fund.
A poll by MarketInvoice also found that relatively few business leaders would consider speaking directly to a bank.
The world’s third-largest economy expanded by 1.0% in the second quarter of 2017 over Q1, giving an annual rise of 4.0% in gross domestic product for the year to June.
The week’s aggressive rhetoric from the US and North Korea have contributed to a rally in defensive assets in global financial markets.