NEW YORK, April 25, 2016 /PRNewswire/ -- Half of US executives reported that acquisitions have been elevated on the boardroom agenda over the last six months, according to EY's semiannual Global Capital Confidence Barometer, now in its 14th edition. The continuation of a stable stream of dealmaking in 2016 has reassured companies that the deal markets are unlikely to suffer a big drop after a record 2015. An overwhelming number of US executives (94%) believe the US M&A market will hold steady, showcasing that the volatile first quarter of 2016 and geopolitical instability have not diminished interest in M&A strategies.
Supporting this optimistic sentiment, 57% of respondents said their companies were planning to pursue an acquisition in the next 12 months. At the same time, more companies expect to pursue alliances, in some cases with the competition, to achieve growth.
"As US executives face anemic organic returns, the impetus for M&A should persist. While it's unclear if record deal values will persist at last year's level, we should still experience one of the best years for M&A in the last decade and the Barometer indicates a sustainable M&A environment as growth, globalization, technology and divestitures, coupled with ample resources, will power M&A forward," said Rich Jeanneret, EY Americas Vice Chair, Transaction Advisory Services. "Boardrooms are taking notice of these conditions and elevating acquisitions as a strategic priority to drive growth, reduce costs and improve margins. The threat of disruption and continued shareholder pressure will keep M&A at the top of their agenda."
More Alliances Forged as Companies Bond to Grapple with Low Inorganic Growth and Bolster Technology
Expect to see more alliances, where companies partner and collaborate in order to create mutual growth and innovation without any one company being the owner. Nearly half of respondents (48%) said they are planning to enter alliances with other companies or competitors to help create value from underutilized assets, signalling a new trend where alliances are used as a route to growth in an increasingly complex environment.
These "industrial mashups" are becoming more attractive as companies look for new sources of revenue and earnings while seeking to keep costs down and achieve economies of scale. Of those companies expected to enter an alliance, 95% said they are doing so to monetize both intangible and tangible assets.
"The historic and largely unprecedented infiltration of technology into all other sectors is a main driver of the increase in alliances," said Jeanneret. "Companies are seeking to bolster and diversify their own R&D processes without some of the risks or requirements that go along with full-blown M&A. Non-tech organizations see that alliances can help them achieve their technology goals more quickly and efficiently than through an acquisition, coupled with greater flexibility to enter and exit. These new, unconventional relationships between companies are the 'sharing economy' in action."
M&A Drivers for US Companies Remain in Place: Shareholder Activism, Hostile Bids, Strong Dollar
Several other factors are at play that will power an increase in buying and bonding among US companies. Respondents say the aggressive search for growth will lead to more unsolicited and hostile deals as companies look to boost market share and revenues and accelerate earnings through synergies. Shareholder activism will also remain a prominent force in dealmaking, forcing more companies to consider divestitures and acquisitions to deliver maximum value to shareholders.
Executives continue to look outside the US for deal opportunities, as 74% of companies plan to pursue acquisition opportunities in foreign markets. Uneven global economic growth and the strong dollar are propelling US companies to look beyond borders for the best assets, and the strength of the dollar continues to make overseas acquisitions attractive.
Deal Pipelines Remain Full: 73% Have More Than One Deal in Pipeline
The positive M&A outlook is bolstered by a robust deal pipeline in the US, with 66% of respondents reporting two to three deals in their companies' respective pipelines. This level of activity is likely to hold steady over the coming 12 months, as 83% of respondents believe their companies will pursue a consistent number of deals. As for deal size, while global respondents are more favorable towards deals falling between $1 billion and $5 billion, the vast majority of US executives expect their company's largest deals to fall below $250 million (68%), followed by those planning deals between $251 million and $1 billion (31%).
US executives' optimism extends to hiring intentions, which matches recent jobs numbers. Fifty-nine percent of US executives say their organization expects to hire in the next 12 months, while only 2% expect to reduce workforce numbers.
Disruption and Distress Fuel M&A in Top Industry Sectors
Unsurprisingly, industries that are quickly evolving are seeing the strongest percentages of intent to actively pursue acquisitions in the next 12 months. Diversified industrial products (69%), financial services (65%) and oil and gas (64%) are expected to be the most acquisitive sectors. The strength of the M&A market in financial services was a trend unique to the US – the sector didn't crack the top five sectors for M&A activity globally.
"The financial services sector is not only dealing with the impact of disruptive technologies on their longstanding processes and infrastructures," said Jeanneret. "It also has to contend with new market entrants and ongoing and evolving regulations and capital requirements. For these reasons, financial services firms are using M&A for focused growth and niche plays, and divestitures for ongoing restructuring, all to meet the demands of both stakeholders and regulators."
Meanwhile, more than one-third of US executives (37%) expect distressed asset sales to become more prominent this year. It has been a particularly challenging year for the oil and gas sector, as many companies find themselves under pressure to cut costs. Those that are especially distressed and over-leveraged will need to consider every option, including a sale.
"We could see more distressed M&A in the commodities sectors, including oil and gas," said Jeanneret. "Energy companies with problematic balance sheets might see increased M&A cooperation from creditors as companies' hedges on oil prices continue to roll off."
Current M&A Boom Driven by Sustainable Factors; US Executives Remain Ahead of the Curve
Historically, M&A has been driven by different factors such as strong growth and surging stock markets. However, the current outlook suggests neither an economic nor continued stock market boom is likely.
"We are in the middle of a more sustained, mature M&A boom—and US executives will lead the way," Jeanneret concluded. "Companies' balance sheets are strong, with ample cash reserves, and executives are showing the patience and foresight to walk away from deals that don't make strategic sense or could be challenging from a regulatory perspective. US executives will continue to think outside the box, in the form of unconventional alliances, and outside their domestic markets when looking for acquisition targets. Companies have the resources to pursue and execute deals."
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About EY's Global Capital Confidence Barometer
The EY Global Capital Confidence Barometer is a biannual survey of more than 1,700 senior executives (445 from the US) from large companies around the world and across industry sectors. This is the 14th semiannual Barometer in the series, which began in November 2009; respondents for the 14th edition were surveyed February and March. 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's Transaction Advisory Services
How organizations manage their Capital Agenda today will define their competitive position tomorrow. Our nearly 10,000-strong professionals across the globe work with our clients to help them make better and more informed decisions about how they strategically manage capital and transactions in a changing world. Whether you're preserving, optimizing, raising or investing capital, EY's Transaction Advisory Services brings together a unique combination of skills, insight and experience to deliver tailored advice attuned to your needs — helping you drive competitive advantage and increased shareholder returns through improved decision-making across all aspects of your Capital Agenda. EY's Transaction Advisory Services was named the Accountancy Firm of the Year in Europe by Mergermarket in 2014, 2013, 2012 and 2010.