Executives around the world have a strong appetite to pursue acquisitions, the highest in six years, according to Ernst & Young’s Global Capital Confidence Barometer (the Report), released at the end of October. The bi-annual Report details how despite market volatility, companies have confidence in deal-making and are pursuing growth opportunities and acquisitions at increasingly high rates. Companies are not only pursuing acquisitions in their own sector, but looking outside their traditional sectors and across borders. The Report highlights how executives are focused on “sustainable” growth, to both safeguard against the cost-cutting measures required over the past decade, but also to build healthy growth for the future.
The Report states that 59% of executives globally expect their company to actively pursue acquisitions in the next 12 months. This is up from 56% back in April and up even further from 40% in October 2014. While the record jump occurred from October last year to April of this year, the slight increase seen over the past six months indicates “a sustained appetite for deal-making” according to the Report. Executives also have growing confidence in the likelihood of closing acquisitions, the quality of the deal-making opportunities, and the number of acquisition opportunities available. In fact, 83% of executives expect the M&A market will improve over the next 12 months, as compared to 60% of executives with this attitude toward the market back in April. The Report indicates that this positive sentiment is predicated on the executives’ positive outlook on the global economy and their confidence in their companies’ ability to succeed in a low-growth environment.
Quality medium-sized deals
So what kinds of deals are making up this healthy M&A market? The Report points to executives being “judicious” and “prudent”, meaning that there seems to be strong strategic rationale for the deals being pursued and executives are in fact willing to walk away from deals which do not align with company strategy. This kind of quality of deals indicates a sense of maturity and stability in the M&A market. In terms of the size of deals being pursued, the majority of acquisitions planned over the next 12 months are generally medium sized, less than US$250 million. The Report however does also point to a trend of more upper-middle-market deals valued between US$250 million and US$1 billion. Mega-deals, those valued over US$1b continue to make up only a small piece of the pie, 3%, which is up from 2% in April.
Pipeline filling up
The number of companies having three or four deals in their pipelines is up significantly from last year, with 13% having four lined up as compared to 8% last year and 30% prepping three deals as compared to 13% this time last year. Most companies do not see these numbers changing over the next year likely because their deal activity is already high.
Risks and challenges
While the M&A outlook is generally very positive, companies continue to confront certain challenges and risks when pursuing acquisitions. According to the Report, poor operating cost assumptions and poor execution of integration following an acquisition are the most highly cited reasons that recent deals have not met expectations. Integration poses a real challenge to companies buying assets outside of their core business or sector. With more and more companies going outside their traditional sector for growth opportunities, the integration of a new business and creation of cost synergies becomes more and more difficult. Cyber-security is also at the forefront of executives’ concerns when pursuing deals. The Report finds that more than 90% of executives view cyber-security as a significant risk.
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