Global mergers and acquisitions (M&A) activity continues to gain strength following heightened dealmaking in the first quarter of 2017, according to the EY 16th Global Capital Confidence Barometer (CCB). Ongoing geopolitical uncertainty has not dented deal appetite among executives.
Based on a survey of more than 2,300 executives across 43 countries, the Barometer finds that even amid rapidly changing market conditions, 56% of companies expect to actively pursue deals in the next 12 months – up six percentage points from a year ago.
At a time of already elevated dealmaking, 36% of companies expect their deal pipelines to expand further in the next year. The vast majority (96%) of executives expect the M&A market to improve or remain stable over the same period.
This strong appetite for deals perseveres against a backdrop of geopolitical or emerging policy concerns, which are seen as the greatest risk to economic growth for 69% of businesses. Yet according to the survey, the disruptive impact of technology on potential deal outcomes and business models remains at the forefront of the minds of the majority of executives.
“Geopolitical and policy uncertainty is a permanent feature of the boardroom, but technology-enabled disruption poses a greater challenge to many business models," said Steve Krouskos, EY Global Vice Chair – Transaction Advisory Services. "The exponential pace of disruption and transformation is compelling executives to engage in M&A. Companies need to innovate to follow rapidly changing customer preferences and buying assets can be the fastest way to radically reshape their business for future growth.”
Resurgent economic confidence and potential rewards of M&A eclipse broader risks
Uncertainty about policy and the potential of increasing intervention by governments – through new policies and regulations – are on the list of executive concerns. But dealmaking is supported by positive corporate indicators and a resurgence of economic confidence – 64% of executives see the state of the global economy as improving (up from 21% in October 2016).
Krouskos says: “Signs of an economic upturn are boosting renewed expectations for growth and further fueling deal intentions. At the same time, investor expectations have also increased. The net result is executives recognize that staying on the deal sidelines could mean they are sidelined from securing future-proofing assets.”
Investing globally in a time of rising nationalism
Fears of increasing protectionism in 2016 have morphed into uncertainty about policy that could impact global trade. However, despite trade barrier speculation, cross-border M&A has already been a hallmark of dealmaking in 2017, with a resurgence of deals between the United States (U.S.) and Western Europe. For companies expecting to do acquisitions, 36% plan to focus on domestic deals in the next 12 months as the search for growth continues overseas. Companies are looking everywhere for pockets of growth, although the main focus has shifted back to developed markets, the CCB finds.
The United Kingdom (UK) rebounds to third most attractive deal destination. It fell out of the top five for the first time in the Barometer’s seven-year history last October following the EU referendum. The U.S. (1st), China (2nd), Germany (4th) and Canada (5th) complete the top five.
Other results point to growth intentions not being curtailed by geopolitical issues. Almost three-quarters of companies (71%) say the Brexit decision has increased or had no impact on their UK investment intentions. In the U.S. there are signs that the new administration will foster further M&A – 76% believe potential policies will either increase or have no impact on deal activity.
“For many companies, cross-border deals are a necessity — successful companies will find ways to navigate challenges such as rising nationalism,” says Krouskos. “Executives are evaluating M&A across a wide range of geographies to secure market access and grow customer base.”
Portfolio optimization comes to the fore amid rapidly changing market
Amid rapid change, companies are building more agility into their strategies, with 73% increasing portfolio review processes to respond to or capitalize on disruptive forces in their sectors. Technology-fueled industry convergence and transformational customer changes are challenging executives to continually reassess and reinvent their businesses.
“Executives are also being proactive in reassessing and reorganizing their geographic footprint to be able to quickly pivot in response to any major trade policy changes,” says Krouskos. “They are looking at options given the recent political developments and may need to be able to shift operations quickly to protect globalized operations and supply chains.”
These considerations are translating into deal activity across all sectors. The top five acquisitive industries are automotive, consumer products, mining & metals, oil & gas and telecommunications.
Disruption drives deals
Buying innovation will be part of the dealmaking fabric in 2017 the Barometer finds. Disruptive startups challenge existing business models – more established companies will look to accelerate growth by acquiring innovative start-ups. These buyers will employ a range of acquisition techniques – from full asset purchases to investments via corporate venture capital arms.
Krouskos says: “For many executives today, the only constraints are the ones they create. They are imagining a future and are using buying and selling strategies to help realize this vision. Companies are playing on their own terms and utilizing more regular and rigorous portfolio reviews to be strategically nimble and opportunistic. Executives are not being distracted by policy speculation that may or may not have an impact in two years when they need to stay focused on the tech start-up that could disrupt their business in two months. M&A is both a protection against that disruption and an opportunity to disrupt the competition.”