81% of US Executives Expect the M&A Market to Improve, According to EY's 11th Global Capital Confidence Barometer

NEW YORK, Oct. 6, 2014 /PRNewswire/ -- Stable markets and a healthy economic outlook are expected to drive disciplined dealmaking over the next year, according to the EY Global Capital Confidence Barometer, now in its 11th semiannual edition. Eighty-one percent of US executives expect the deal market to improve in the next 12 months, a jump from 52% a year ago and 53% in the last Barometer in April 2014. Additionally, 33% of executives plan to pursue a deal in the next 12 months; although this percentage is down from 41% a year ago, it is up from 29% six months ago, and respondents say the quality and diversity of deals in their pipelines are high.

"After a slow but steady macroeconomic rebound that saw the US out in front, every indication says the US will be ahead of the curve on dealmaking as well," said Rich Jeanneret, Americas Vice Chair, Transaction Advisory Services, EY. "More than we've seen in recent years, corporates are in the financial and strategic position to do deals. And while they are treating M&A with extreme discipline, we're seeing a renewed willingness to take chances in order to grow and innovate."

Deal pipelines are robust in the US
US deal pipelines are frothier than their global peers, with 41% of US companies saying they have five or more deals in their pipelines versus 23% globally. In addition, 56% of US executives have a positive outlook on the number of acquisition opportunities. Notably, 87% of US executives expect their pipelines to increase or stay stable. Moreover, 50% of those surveyed have a positive outlook on the quality of acquisition opportunities, up from 46% a year ago.

In the US, middle-market acquisitions — particularly those on the smaller end of the range, between $50 million and $250 million — are expected to nearly double in the next 12 months: 52% of US companies expect to pursue deals of this size, versus 31% globally. This suggests that deal volumes overall may start to creep up as an increasing number of midsized transactions are planned.

"We are encouraged by the expected increase in middle-market deals in the US," said Jeanneret. "This is likely a follow-on to some of the larger deals we have seen over the past year. A wave of megadeals like the one we just experienced tends to spur a herd mentality, and more middle-market acquisitions come to fruition."

According to the Barometer, the sectors most likely to see deal activity in the US are automotive and transportation, with 51% of those companies expecting to do a deal; technology companies, 38%; consumer products and retail, 31%; and financial services, 30%. The search for intellectual property and emergent technology may drive much of the activity in these sectors, not just in the tech industry itself.

US companies have sharpened their focus on developed-market businesses. To that end, the Barometer points toward Australia, Brazil, Canada, Germany and the UK as the countries with the greatest likely US investment activity. In addition to Europe and North America, which remain central hubs of cross-border deal flow, Australia is a key destination for cross-border assets; and China and Japan are increasingly looking outbound for assets, which could also trigger US deal investment.

Strong environment for transactions
Executives broadly agree that the macroeconomic environment in the US is supportive for dealmaking. Strikingly, 99% of executives see the economy as stable or improving; 75% see it improving, up from 48% one year ago. Sentiment toward corporate indicators has also dramatically improved: 79% express confidence in corporate earnings, up from 38% a year ago; 66% are confident about credit availability, up from 55% a year ago; 65% expect short-term market stability, from just 21% a year ago; and 55% feel similarly about long-term equity valuations and market performance, compared with 31% a year ago.

Valuations also bode well for transactions this year. More than half (52%) of corporate decision-makers expect asset valuations to remain stable over the next year, up from 42% a year ago. In addition, 47% think the valuation gap is small (less than 10%), with 83% expecting the gap to contract or stay the same over the next 12 months.

Innovation and growth worth the risk
Growth is a priority for 50% of executives, up from 40% in the last Barometer, and it is clear that they are taking opportunistic risks. Half of US respondents are devoting a major proportion of their growth capital to acquisitions, compared with less than one-third of global respondents.

Moreover, the transactions coming down the pike this year will likely be strategic, disruptive, and focused on innovation — but the importance of margin growth has not diminished. Nearly half of US respondents, 48% cite that their inorganic growth will take the form of innovative investments that shift the scope of their business, either into another industry or sector; and 35% will pursue deals to gain access to new technology and intellectual property. However, reducing costs and improving margins still play the biggest role in managements' M&A strategies — 47% of respondents cite this as a motivation, and 36% will pursue deals in order to make supply chain improvements.

Shareholder activism continues
Shareholder activism is also shaping transaction activity: 60% of companies have elevated spinoffs, IPOs, strategic divestments, and acquisitions on their boardroom agenda as a result of shareholder activism, and 81% report that they are addressing activism in various concrete ways.

"We have seen an increased focus on shareholder activism for a few years now, especially in the US," added Jeanneret. "This is due to regulatory differences that allow greater shareholder participation and enable activist investors to raise billions of dollars to buy stakes in companies. As a result, companies are stepping up their efforts to manage shareholder activism, and nearly a third of US companies are watching out for early warning signs of activist pressure in order to be prepared."

Corporates taking on debt to do deals
The economic environment and shareholder pressures aside, companies' financials are in a good position for transacting, and management teams will take on more debt in order to fund their growth ambitions. Sixty-one percent of companies achieved healthy balance sheets with a debt-to-capital ratio of less than 25%, an improvement over 35% six months ago and 40% a year ago. But the era of delevering may be over as executives ramp up for more deals. Thirty-six percent expect to increase their debt-to-capital ratios over the next 12 months, and 55% expect debt to be their primary source of financing inorganic growth.

"Corporates' appetite for M&A continues to grow, but management teams won't do deals at any cost," said Jeanneret. "As a result, companies will not shy away from innovation, but a disciplined approach to costs and efficiencies will continue to take center stage."

Conclusion
After several consecutive years of improving confidence in the economy and the deal markets, US companies are leading the global market in a gradual M&A revival, though more gradually than the last decade's M&A boom.

"US companies are ahead of their global peers when it comes to M&A," concluded Jeanneret. "They are already moving from the consideration phase to the deep evaluation phase, which will likely lead to execution as the recovery heats up."

About the survey
The EY Capital Confidence Barometer is a semiannual survey of more than 1,600 senior executives from large companies around the world and across industry sectors. This is the 11th semiannual Barometer in the series, which began in November 2009; respondents for the 11th edition were surveyed in September. The objective of the Barometer is to gauge corporate confidence in the global and domestic economic outlook, to understand boardroom priorities in the next 12 months, and to identify emerging capital practices that will distinguish those companies building competitive advantage as the global economy continues to evolve.

About EY
EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

EY refers to the global organization and may refer to one or more of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.

This news release has been issued by Ernst & Young LLP, an EY member firm serving clients in the US.

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