Mixed M&A Messages as Confidence Surges

NEW YORK, April 12, 2011 /PRNewswire/ -- Against a backdrop of renewed global corporate confidence, one-third of global businesses are looking for new acquisitions in the next six months, suggesting an increase in M&A activity in the near term. In the longer term, the appetite for M&A declines as companies are set to increasingly look within for growth, according to the fourth bi-annual Capital confidence barometer, by Ernst & Young.

Since October there has been an 18% uptick in the number of companies likely to acquire businesses in the next six months. The proportion likely to acquire in the next one to two years remains relatively high at 44% but is nevertheless declining, compared to 54% in October 2010 and 67% in April 2010.

Rich Jeanneret, Americas Vice-Chair, Transaction Advisory Services at Ernst & Young LLP says: "Signs of confidence in dealmaking are coming back, and in the US, companies are more eager to get deals done. In fact, 36% of companies plan to make acquisitions in the next six months, up from 22% six months ago. They are more bullish on growth than they have been over the past 18 months, and M&A is seen as a key component to that growth, as our Capital confidence barometer suggests. However, the overall effect of political, economic and environmental factors remains to be seen and a true M&A comeback is hard to call."

Global surge in confidence

The survey of more than 1,000 senior executives around the world, conducted in March, finds that almost 60% of businesses can now see an end to the financial crisis (within 12 months). In addition, a fifth of global businesses surveyed already consider the downturn to be over in the global economy – the first significant increase in confidence among executives in 18 months.

More than half of respondents (56%) said capital market conditions were continuing to improve with access to funding for capital projects not a problem for 38% of respondents.

Pip McCrostie, Global Vice-Chair, Transaction Advisory Services, for the global Ernst & Young network says: "New found confidence is enabling businesses to shift their focus to growth and away from defensive measures. We certainly see increased appetite for acquisitions in the next six months as businesses seize opportunities in the current environment. However, external factors such as political instability in the Middle East, natural disasters and fiscal dampeners in the form of higher taxes and inflation may rein in M&A activity longer term."

"Many of the critical M&A foundations are in place: balance sheets are stronger, interest rates remain low and there is a greater access to capital – but that has been the case for some time," says McCrostie. "Last year we saw a number of false starts to M&A recovery. We should see increased levels of M&A in 2011, but further external shocks may lessen M&A appetite and prompt boardrooms to put acquisition plans on hold."

Organic growth back on the agenda

The dominant priority for almost 50% of businesses is organic growth – nearly double that of 18 months ago. Corporations are increasingly focused on building sustainable business improvements through customer segmentation and portfolio management.

"It's challenging for companies to see beyond the next six months given the constantly changing events we are experiencing," says McCrostie. "Without that longer term line of sight many will look closer to home and look to achieve growth through organic measures rather than M&A."

New hurdles for M&A as investor caution eases

The new number one deal breaker now is the valuation gap between buyer and seller expectations, which leapt by nearly a third from 38% to 50%. Concern over the uncertainty or complexity of valuations was also significant for 49% of respondents.

In October 2010 the biggest obstacle to completing an M&A transaction was investor caution. While still an issue, this has eased a little (down to 46%).

"The new hurdle around the valuation gap is being influenced by external factors – for example, the prospect of higher interest rates and rising commodity prices," says McCrostie. "It's difficult to put a price on something when factors affecting its value are fluctuating. Greater certainty will see these issues recede and encourage more M&A activity."

Rush to re-finance is almost over

Over the last six months the percentage of companies that have refinanced has significantly increased. Four-fifths of the businesses surveyed have now re-financed their balance sheets, compared with 52% in October 2010. But for those that need to re-finance, there is real urgency to access capital. Two-thirds of those needing to, must do so within six months.

Says Jeanneret: "Companies that are aggressively managing their capital agenda are gaining competitive advantage. Those that have focused on preserving and optimizing cash will have a leg up as they seek opportunities to raise and invest capital to fund organic growth or acquisitions in the future."

Many still face significant stress in their business operations – and almost one in 10 remain focused simply on survival. Of those, 75% indicate they have stress in their core and subsidiary businesses, many citing liquidity pressures as their single biggest problem.

According to McCrostie, "Leading companies have taken action to address their most pressing financial issues through cost cutting measures and improving their working capital. Those companies are now moving into a new phase of building sustainable business improvements to achieve organic growth. Those that were unable to take remedial actions are being left behind and the opportunities to catch-up may be passing them by as their options become increasingly limited."

About the survey

The Ernst & Young Capital confidence barometer is a survey of more than 1000 senior executives from large companies around the world and across industry sectors. The objective of the Barometer is to gauge corporate confidence in the economic outlook, to understand boardroom priorities in the next 12 months, and to identify the emerging capital practices that will distinguish those companies that will build competitive advantage as the global economy continues to evolve. This is the fourth bi-annual Barometer in the series, which began in November 2009.

About Ernst & Young

Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 141,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.

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SOURCE Ernst & Young