Richard Jeanneret, Vice-Chair, Transaction Advisory Services at Ernst & Young LLP says: "Improving market conditions have more companies shopping again and those with capital to deploy are ahead of the game. There's a greater focus on growth opportunities and M&A is one way to achieve that goal."
Economic confidence improving
Confidence in the global economy as a whole is improving – 40% of respondents expect the downturn to end within 12 months, compared to 30% last November. Sixty four percent (64%) of respondents are now more optimistic about the prospects for their local economy and 69% for the prospects for their company. The most optimistic countries are Australia (93%), India (91%), Brazil (83%) and China (80%). Some of the western developed markets were the least confident – France (44%), US (56%) and UK (57%).
In terms of industry sectors, 61% of respondents expect the downturn to end in their industries within 12 months, compared to just 49% six months ago.
Among the sectors, the survey shows Automotive as the most confident of growth (81%) with Power & Utilities the least confident (59%). Yet it is the Power & Utilities sector that is, together with Pharma and Life Sciences most focused on inorganic growth, including through M&A. Sixty nine percent (69%) of Oil & Gas companies are the keenest to sell businesses, through planned divestments within the next six months.
New dynamic: buyers focused on future potential rather than past performance
The global downturn has had a significant impact on deal dynamics. A new development is that potential buyers are looking more closely at growth opportunities such as revenue growth rate, future market share and new customer markets, rather than historical data.
Post-deal integration is now also critical with 77% citing potential synergy identification and realization in transactions as a high priority. This may in part be a recognition of past mistakes – almost one third (32%) of respondents stated that the last transaction they completed did not meet expectations or was not actively monitored in terms of value achieved.
"Due diligence is still the name of the game," says Jeanneret. "Buyers want to feel confident about the company's value after a deal has been done. Sellers need to continue to provide transparency and integration processes need to be baked in and clear from the start."
Challenges still remain
Against a backdrop of increasing optimism there are still some significant challenges ahead. For instance, a wave of refinancing is expected with 58% of companies needing to refinance loans or other debt within the next four years – so access to capital markets remains crucial.
Driving operational fitness and working capital management remains absolutely critical. While the need for operational restructuring has declined since the previous survey, more than a third of companies (35%) still need to restructure their core business. Eighty six percent (86%) have reviewed their working capital processes and made some improvements. Fifty four percent (54%) of these have been tactical and short-term improvements, so ongoing discipline is still needed.
Jeanneret concludes, "Companies build and achieve long-term competitive advantage by managing all aspects of the capital agenda: preserving, optimizing, raising and investing capital. Our findings continue to underline one critical fact: organizations that manage their capital today will define their competitive position tomorrow."
About the survey
The Ernst & Young Capital confidence barometer is a survey of over 800 senior executives from large companies around the world and across industry sectors. The objective of the Barometer is to gauge corporate confidence in the economic outlook, to understand boardroom priorities in the next 12 months, and to identify the emerging capital practices that will distinguish those companies that will build competitive advantage as the global economy continues to evolve. This is the follow up to the first Barometer in November 2009.
