M&A - Strong deal fundamentals remain but corporates are cautious in the short-term

• Optimism for M&A in the US remains steady but expectations for acquisition plans falls 10 percentage points globally, despite a more positive economic outlook

• Boardroom balances buying opportunities with optimizing portfolio and divesting core business assets

• Pent up demand for deals persists as companies build cash piles and credit improves but caution remains



A more favorable deal making environment is not yet convincing corporations to engage in mergers & acquisitions (M&A), according to Ernst & Young’s latest Global Capital Confidence Barometer, based on a survey last month of more than 1,500 senior executives in 57 countries around the world. Only 31% of those surveyed globally said they expected to pursue an acquisition in the next 12 months, compared with 41% in October 2011 and the lowest figure since the barometer began in late 2009. In the US, expectations are steady with 34% of companies planning an acquisition in the next year, compared with 36% six months ago. The number of businesses looking to sell assets has also been consistent in the US with 34% planning to divest in the next 12 months compared with 30% in October 2011.

"Our Capital Confidence Barometer shows confidence in the economy as it continues to improve. Last October, we found dealmakers had cash on the books, and access to credit but were lacking the confidence to do deals. The current Barometer finds corporate executives with adequate cash and credit and in a more confident frame of mind, but still conservative about pulling the trigger on a deal,” said Richard M. Jeanneret, Vice Chair, Transaction Advisory Services at Ernst & Young LLP.

In terms of acquisitions, companies in the financial services, life sciences, oil and gas, technology and consumer products sectors said they were more likely to do deals. When US respondents were asked where they expect to execute deals, China, India, Canada, Brazil and the UK were their top five target markets.

US buyers shifting toward debt to fund deals; global buyers still using cash

A combination of stronger operating results, cost-reduction programs and risk aversion has meant that large companies globally have accumulated large stockpiles of cash. Growth remains a top priority for companies with excess cash and 50% of global respondents are focused on organic growth versus 43% of US respondents. Twenty-one percent of US respondents are focused on inorganic growth, compared with 16% of global respondents. Among global companies who say they either reengaged in M&A or are thinking about it, 43% say they will use cash as their primary source of funding. Debt saw an increase in popularity in the US as a means of deal funding due to low costs and improved confidence in credit availability. In the US 48% of companies would use debt to finance an acquisition compared with 33% six months ago.

More companies sold on divesting

The overall conservative nature of attitudes toward M&A is reflected in both global and US respondents focus on creating value through organic growth, portfolio optimization and divestment. Over a third (34%) of companies in the US are expected to divest in the next 12 months. Around the globe, there are as many companies looking to divest - 31% - as there are looking to acquire, also 31%.

“We continue to see divestitures move up the corporate agenda as companies more carefully manage their portfolio and look to asset sales such as carve-outs and spin-offs as a tool to raise capital for growth and build shareholder value,” added Jeanneret.

Sectors with companies most likely to pursue a divestment include: oil and gas, life sciences, consumer products, mining and metals, and power and utilities. Companies headquartered in Brazil, Japan, the UK, Germany and Canada are among the most inclined to sell assets.

Economic outlook brighter, with a marked shift in developed markets_

There were clear signs from the survey that the upswing in economic confidence is feeding overall business confidence. The proportion of those surveyed who thought that the global economic situation is improving has increased to 52% in April 2012 from 26% in October 2011. Only 20% remain pessimistic about the economy, compared with 37% six months ago.

"As the US and other mature economies show signs of economic improvement after years of challenges, emerging markets such as China, Brazil and India, which have commanded investment growth, are beginning to moderate, said Pip McCrostie, Global Vice Chair, Transaction Advisory Services, at Ernst & Young. “These key emerging economies are still growing much more quickly than developed markets, but their pace of expansion has slowed.”

Among broader business confidence indicators, there were improvements in sentiment across the board, with more positive figures for expected corporate earnings, employment growth, credit availability and the regulatory environment.

So what happens next?_

Despite the improvement in economic performance and modest uptick in business confidence, companies still remain cautious in their outlook, particularly over the short term.

Jeanneret concludes, "There is positive sentiment around credit conditions improving, companies’ focus on growth, and M&A valuations increasing that could potentially contribute to a healthier M&A environment. We remain optimistic about companies increasing deal activity in the long-term.”