Despite deal levels above their pre-financial crisis highs in 2007, global appetite for mergers and acquisitions (M&A) shows no sign of waning, according to the 18th EY Global Capital Confidence Barometer (CCB).
The biannual survey of more than 2,500 executives across 43 countries shows rising economic and corporate confidence and the drive for innovation and growth are outweighing geopolitical and regulatory concerns as more than half of respondents (52percent) indicate that they plan to acquire in the next 12 months.
Nearly two-thirds of executives (61percent) expect the number of deals in their M&A pipeline to increase over the next 12 months – up from 36percent in April 2017. The number of executives expecting to complete more deals in the next year has more than doubled (67percent in April 2018 versus 33percent in April 2017).
In addition, an overwhelming majority of executives (86percent) expect the global M&A market to grow further over the coming 12 months – a significant increase from last year (39percent). And, more than three-quarters of executives (80percent) predict increased competition for M&A assets in the next year, with most (68percent) of those respondents citing private equity (PE) as the biggest competitor.
Steve Krouskos, EY Global Vice Chair – Transaction Advisory Services, says: “Rising confidence and the continued drive for digital is seeing deal pipelines and M&A appetite increasing, and we expect this to remain strong for the foreseeable future. The private equity deal activity increase we saw in 2017 looks to be accelerating. Interestingly, while we can anticipate intense competition, we may also see more collaboration as private equity investors club together with corporates to do deals.”
Strong dealmaking intentions are supported by positive macroeconomic and capital market factors. The majority of executives (73percent) believe global economic growth is improving. Three-quarters (77percent) of respondents also believe corporate earnings are set to improve, while just 2percent predict a decline in valuations. Similarly, only 2percent see any potential for market stability to deteriorate. In contrast to current market sentiment among many commentators, the survey found that executives are looking at their own fundamentals and seeing a brighter outlook for capital markets.
Geopolitical and regulatory uncertainties are not deterring dealmaking prospects
Despite current geopolitical tensions, a majority of executives surveyed (75percent) expect governments to increase infrastructure spending over the next 12 months, and almost two-thirds (64percent) of those executives say that the increased government investment would support their own corporate growth.
However, executives also recognise that geopolitical uncertainty poses challenges, with close to half (43percent) seeing it as a key risk. Changes in policy and protectionism are also seen as risks that could hamper growth among more than a third of respondents (36percent).
Krouskos says: “Current geopolitical uncertainty is undoubtedly front of mind for all CEOs. However, whatever trade agreements exist between countries, boards will need to ensure companies can continue trading assets across borders. The current growth imperative means companies will remain focused on accessing new markets or acquiring innovation as they look to transform their portfolios.”
Portfolio transformation and the quest for digital skills are driving deal activity.
Almost three-quarters (70percent) of respondents see portfolio transformation as the top priority on the boardroom agenda, as companies look to remain agile, alert to new opportunities and need to quickly respond to a fast-moving market environment.
Companies are increasingly using data analytics and artificial intelligence (AI) to make better informed decisions about their portfolios. AI and robotic process automation (RPA) are most prominent for almost half (46percent) of respondents’ boards, followed by cloud computing and big data (38percent) and blockchain (15percent).
As more companies adopt new technologies, more than half of executives (55percent) indicate that they are struggling to hire people with the right skillset and 67percent cite talent acquisition as a main strategic driver for pursuing M&A.
Krouskos says: “Digital transformation is driving companies to adopt a laser focus on portfolio transformation. Opportunities offered by new technologies as well as the potential threats posed by digitally savvy competitors are now key factors in businesses’ transformation plans.”