Deals expected to pick up this year
New M&A surge forecast as bullish companies look overseas for expansion
Deal appetite is said to be at a record high with the technology, industrials, media and property sectors the most likely to be targeted.
A striking 58% of UK companies said they intend to acquire assets over the next 12 months, according to EY’s 12th Global Capital Confidence Barometer – the strongest appetite shown by UK corporates to acquire since the survey began in 2009.
· 81% of respondents expect their deal pipeline to increase over the next 12 months
· UK executives surveyed are feeling more optimistic about the global than UK economy
· Cross-border deals set to increase with 88% of executives targeting investment opportunities outside UK
· Technology, Industrials, Media and Real Estate sectors likely to be most active
The Barometer – a biannual survey of more than 1,600 executives – has found that an already buoyant deal market is set to achieve new heights. UK deal value already up 33% on 2014 year-to-date figures.
It notes that 88% of companies have changed their M&A strategy as a result of increased deal activity in 2014. This suggests high-profile megadeal activity has triggered activity across the whole deal landscape. All respondents expect the deal market to improve or remain at current robust levels over the next 12 months.
Mark Harvey, Senior Partner, EY Scotland, said: “The Scottish market has historically seen some high profile transactions and is primed for further growth with a strong deal pipeline over the next 12 months.
“As the Barometer suggests, there is a greater risk appetite driving M&A activity in the region and the most successful corporates are those which understand that to remain competitive they need to sustain a healthy level of transactions, and their deal pipeline will reflect this strategy.”
The survey has found that confidence in the global economy is soaring, with 91% of UK executives feeling optimistic, up from 57% just 12 months ago. This is providing strong foundations for deal intentions – as is continued confidence in corporate earnings (99% – up from 69% 12 months ago).
In addition, deal fundamentals are helping to buoy activity. The “valuation gap” remains stable with nearly all respondents (99%) foreseeing no change in the next 12 months. Credit availability has been boosted by QE in Europe and low interest rates – 90% are confident in the availability of credit up from 61% 12 months ago.
However, 52% of companies view increased global and regional political instability as the biggest risk to their business. In addition, recent uncertainty associated with volatility in commodities and currencies is cited by nearly a third (30%) as another significant risk. Yet, while some consider that a growth risk, others see it as an M&A opportunity.
Mr Harvey said: “The low price of oil and currency fluctuations are viewed as a challenge, further elevating the need for cost reduction in the short term for many businesses. But lower oil prices and a stronger pound are is also driving M&A activity as companies see improved margins and lower sterling prices in the Eurozone.”
Cross-border deals look set to be the hallmark of the new wave of deals with 88% of executives targeting investment opportunities beyond their own borders.
Companies plan to invest most of their acquisition capital in developed markets for near-term growth. Interest in the emerging markets is expected to remain muted in the short term, with 81% of executives planning to allocate less than 10% of acquisition capital to developing regions.
According to the Barometer, the UK, China, the US, Germany and Australia are the top five destinations of choice for global investors, while for UK corporate investors, the Netherlands, Singapore, US and Malaysia, are the top five global destinations of choice. In terms of buyers, companies from the US, South Korea, UK, France, Germany and Japan will be the most prominent acquirers globally.
Mr Harvey says, “The UK is the strongest economy in the Eurozone currently so it comes as little surprise that overseas acquirers view UK-based assets as attractive targets. There is lots of capital from North America and Japan, for example, looking to invest and acquire assets in jurisdictions that offer real growth potential.
“Overseas businesses are searching for growth to help transform their business models. More and more businesses are thinking carefully about what markets they operate in, where they have invested and how M&A can get them on the right side of the economic growth line.”
Increasing corporate confidence, positive economic conditions, regional variations, movements in currencies and commodities as well as disruptive sector plays will give already strong M&A momentum a further boost in the next year.
Mr Harvey concludes: “M&A turned a corner in 2014, with deals once again being seen as a route to growth. This year will see a surge of new entrants and companies returning to the M&A market to generate future growth.
“Looking forward, we expect the need to reposition for changing economic and technological drivers to be the force behind increased transaction activity even in a lower growth world. M&A will increasingly be driven by the need to move to the right side of the economic success and technology line.”