Forty percent of companies anticipate pursuing acquisitions in the next 12 months – the highest number for three years according to EY’s 11th bi-annual Global Capital confidence barometer.
More robust market conditions and expanding deal pipelines should see global M&A return to 2006 pre-crisis volume and value levels after a five-year deal slump.
While 2014 has been notable for high-profile mega-deals, the Barometer suggests that mid-market M&A will provide significant lift to deal activity. Almost two thirds (60%) of respondents expect deal volume to increase further in the next 12 months – even after a relatively positive 2014 for M&A.
“Our previous Barometer predicted the wave of mega-deals seen in 2014," says Pip McCrostie, EY’s Global Vice Chair, Transaction Advisory Services.
McCrostie notes these multi-billion dollars deals are having a ripple effect on the M&A market. They increase confidence in M&A and trigger transaction activity further down the deal chain.
“With the appetite to acquire at its highest for three years, we now expect a new wave of M&A with much more focus on mid-market sized deals under US$1b. This new middle-market momentum should lift M&A activity as companies seek to strengthen – and expand – their core business. The result should be a far more buoyant deal market than we’ve seen for the past five years.”
Pipeline bulges as stability provides platform for bullish deal intentions
A bulging M&A pipeline is the clearest indicator of future activity. The deal pipeline has increased by a remarkable 30% since April. In addition, two thirds (66%) of executives expect the M&A pipeline to expand further over the next year – this is more than double the number expecting expansion six months ago.
A further sign of bullish deal sentiment sees more than half (53%) of respondents anticipating an increase in hostile and unsolicited approaches.
Greater stability in terms of macro-economic confidence and valuations are stimulating bullish deal sentiments. The valuation gap remains stable. Half of executives see only a small discrepancy between buyers’ and sellers’ expectations on asset prices – encouraging dealmaking in the near term.
M&A activity is also supported by greater C-suite confidence levels in the global macroeconomic climate.
The number of executives who view the global economy as stable has almost doubled in a year (from 24% to 44%).
Geopolitical issues remain the biggest concern for 37% of executives – up from 30% six months ago. However, this concern is counteracted by a huge swing in positive sentiment regarding corporate earnings (43% to 77% in 12 months) and a trebling of confidence in short-term market stability (21% to 64% in 12 months).
“Stable asset prices as well as increasing confidence in stability of the global economy are encouraging a more buoyant outlook for M&A. Having experienced many years of volatility, this growing stability provides greater certainty in terms of strategic planning – although executives will continue to closely monitor unfolding geopolitical events,” says McCrostie.
Momentum in middle-market to drive M&A
The M&A story of 2014 so far has been the return of the mega-deal. The climate continues to remain favorable for large acquisitions. However, the growth of M&A for the next year should be in the wave of middle-market deals, with a major shift in focus among respondents looking to do deals valued at US$250m and under.
According to McCrostie, the majority of companies are focusing on acquiring businesses in their core sectors, with an eye to boosting market share, managing costs and improving margin growth.
"As cost efficiencies are paramount, for the vast majority, planned M&A activity will consist of bolt-on acquisitions that will complement their current business model,” she adds.
The increasing influence of shareholder activism is helping to ensure that cost management remains a critical component of organic and inorganic growth strategies.
Half (48%) of respondents say that cost reduction has been elevated on the boardroom agenda as a result of shareholder activists. The focus on costs is encouraging M&A to strengthen core operations.
While the majority of companies are focusing on acquiring bolt-on businesses, more than a third (37%) still expect to undertake transformational deals, with the US corporates leading in this area.
The upper end of the M&A market should continue to see mega-deals, but we can also now expect a formerly subdued middle-market to vigorously enter the fray.
The destinations and sectors of deal choice
Sentiment towards mature and emerging markets remains balanced. Countries such as the US, UK, China, Japan, India and Australia are expected to be the key potential buyers.
Meanwhile, Brazil, China, India, UK and the US are the top five destinations of investment choice.
Sectors with the highest level of acquisitive intent are automotive, technology, life sciences, telecommunications and consumer products.