Renewed economic confidence not enough to spur M&A activity
So far, 2012 has been relatively subdued in terms of global mergers and acquisitions. This is not to say that confidence has dropped. On the contrary, economic and business confidence is up - companies just don’t seem to want to spend their money.
The latest Ernst & Young Capital Confidence Barometer, which questioned some 1,500 senior executives around the world, found that only 31 per cent said they would expect to pursue a merger or acquisition in the coming year. This is down from 41 per cent who said the same in October last year.
Analysts might expect these figures to correspond with a downturn in business confidence. However, the proportion of respondents who said they thought the global economic position was improving increased to an impressive 52 per cent, from just 26 per cent six months ago.
Positivity was felt in several business areas, including employment, corporate earnings, the regulatory environment and the availability of credit. In terms of regions, the most positivity was felt in developed economies that have spent the past few years feeling anything but positive. The UK, other parts of Europe and the US were among the most confident, while confidence remained flat in emerging economies, which enjoyed huge growth during the global economic crisis years.
So if businesses aren't considering M&As, how do they expect to grow?
Well, it seems the tide is turning and organic growth is now being considered as a realistic option for businesses in developed economies. For a number of years, firms in Europe and the US looked at growth prospects further afield in order to grow their businesses, as opportunities within their own stagnant markets seems scarce, but this could all be changing.
However, these firms, which have developed large cash piles through frugality during the recession are keen to protect and improve on their bank balances through divestment. Ernst & Young’s Global Vice-Chair of Transaction Advisory Services, Pip McCrostie, told inaudit.com: "Companies are looking to focus on streamlining their operations and there is still a desire to grow their stockpiles of cash.
“More companies are now looking inwardly - at managing their portfolios and non-core assets – rather than outwardly at potential buying opportunities.”
Some industries are set to show more interest in selling divisions, according to Ernst & Young, including consumer products, life sciences, mining, utilities and oil and gas. In terms of regions, there are also clear trends – with businesses based in Japan, Germany, the UK, Canada and Germany the most interested in divestment.
Although total M&A volumes dropped by 22 per cent in the first quarter of 2012, there are still some deals being done. There is expected to be huge rise in deals coming from Australasia and developed regions like the UK, Germany and the US, which are also set to be more active in the M&A market than some others.
In terms of target countries, emerging economies do still seem to be attracting the most attention. The Ernst & Young report found that China, India, the US, Brazil and Indonesia were the top five target countries for M&A.
Overall, among the firms still taking part in mergers and acquisitions, there is a much greater emphasis on caution and diligence. One analyst, Tony Damian from Freehills M&A, summed the market up nicely when speaking to Australian Legal Business. He said, “People want to get it right…that means the deals are tested a little bit more than they would have been – an extra board meeting or two, more strategy meetings. But I don’t see that as a bad thing.”