Despite the return of favorable conditions for mergers and acquisitions (M&As), a quarter fewer (29%) global businesses are actively seeking acquisition targets, in stark contrast to the appetite for deals six months ago (38%). The fall comes despite only 16% feeling restricted in their ability to pursue growth through M&As compared to 40% a year ago, according to a global survey of over 1,000 senior executives around the world, by Ernst & Young.
The third bi-annual “Capital Confidence Barometer,” conducted in October, also finds greater optimism among executives about their own company and local economy prospects tempered by greater pessimism about the global picture. Austerity measures, increasing taxes, currency conflicts and regulatory concerns among other issues are undermining confidence in the global economy and reducing the appetite for M&A.
Half of the respondents now feel well-positioned to execute an acquisition at short notice – up from 36% in 2009 – but more companies are reluctant to commit to a deal. The majority of those that are, look to acquire in emerging markets.
There may be a drop in the appetite for M&A generally but we could see some bold first-mover activity given the fall in respondents saying they were likely or highly likely to make a divestment over the next six months (down to 15% from 38% in April) was higher relatively, than the fall in buyers – increasing the gap between the number of potential buyers and willing sellers.
“Over the last year, boards have responded to ongoing uncertainty by improving their ability to respond quickly to opportunities that may arise. Yet boardrooms remain cautious, due to investor caution, regulatory and political changes – driving a greater focus on organic growth and performance improvement,” says Pip McCrostie, Global Vice-Chair, Transaction Advisory Services, at Ernst & Young.
Seventy-five percent of respondents are now focused on organic growth as their capital allocation priority, through restructuring and performance improvement, compared to 66% six months ago.
Optimism for M&A Activities in Southeast Asia
In Singapore, a poll among over 30 corporate development officers and transaction leaders, who gathered at the Ernst & Young Transaction Leaders Forum held two weeks ago, showed largely positive and optimistic sentiments regarding the prospects for M&A activities over the next 12 months for Southeast Asian economies.
Many of the participants indicated “strategic acquisitions” as the principal driver of M&A activity over the next 12 months in Southeast Asia. However, misaligned price expectations and lack of suitable targets are some of the key constraints companies face.
Respondents from the poll also felt that deal sizes are likely to remain small (<US$100 million) at this point in time. However, a majority of them expect exit multiples for M&A transactions to increase over the next 12 months in Southeast Asia.
“Situated between India and China, Southeast Asia presents one of the best performing emerging economic regions that offer excellent opportunities for investment in relatively better risk profiled geographies,” comments Harsha Basnayake, Singapore and Asean Sub-Area Leader for Transaction Advisory Services, Ernst & Young.
Credit Conditions Improve
Overall optimism is increasing for local economies, as 67% of respondents feel more confident about the prospects of their local economy compared to in April. Levels of confidence in India (92%) and China (82%) remain high compared to six months ago, but former leader Australia drops out of the top five most confident economies. Russia (89% from 47% in April) and Germany (84% from 64%) enter the top five, while France (66% from 44%) has also seen a large rise in confidence.
In contrast, the outlook for the global economy is less optimistic, with 34% believing recovery will happen within the next 12 months, compared to 40% six months ago.
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