The drive for global M&A and alliances in 2016 remains strong, according to professional services firm EY’s 14th global capital confidence barometer (CCB), a survey of more than 1700 executives across 45 countries now in its seventh year. Half of respondents surveyed plan M&A in the coming 12 months, and 40% seek to form alliances, with the latter citing digital transformation of the business environment and lowered risk as incentives to enter into alliances with companies of different areas of expertise. Moreover, nearly a third of respondents expect distressed asset sales to drive portfolio reviews. The strong M&A appetite is said to come off the back of prolonged low inflation and subdued economic growth, as deals and alliances generate higher returns than organic growth alone.
Deal pipelines are set to be more robust, the CCB reported, “and over 80% of those planning deals have more than one in their M&A pipeline”. Across the board, deals are expected to be bigger and bolder, with “a five-fold increase” in firms seeking to acquire assets of between $1bn and $5bn.
“Executives now find themselves planning for multiple possible futures,” said Pip McCrostie, global vice-chair of transaction advisory services at EY. “Buying and selling can be a transformative means to reshape and refocus the business. M&A remains a strong option to accelerate strategic plans and offers the prospect of game-changing competitive advantage.”
The survey also indicated an enthusiasm for new markets, with three-quarters of companies primarily looking for crossborder acquisitions. “Western Europe is again the primary region of choice as companies look to take advantage of relatively lower valuations and cheaper financing,” Ms McCrostie explained. “A sustained improvement in economic conditions in Europe will likely accelerate the pace of inbound acquisitions, especially from the UK, Germany, Japan, the US and especially China.”
China has been bullish in terms of outbound investment, with a significant shift from developing to developed markets. Chinese companies have already spent more than $100bn on overseas assets from February 2016 until April 2016 – “the highest value on record,” noted Ms McCrostie. One driver is China’s need to acquire intellectual-property-rich assets to support the rebalancing of the domestic economy, she explained. “The other driver is the upward move of Chinese companies along the value chain in many sectors. Chinese businesses are buying high-quality assets, especially in Western Europe and the US.”
Viewed as highly strategic yet lower risk, alliances are also increasingly popular options for companies, the survey found, allowing them to take advantage of industry expertise in sectors outside their own. More informal and easier to enter and exit than a deal, an alliance enables companies to respond to market evolutions, particularly in the digital and tech spheres. Business services, IT, oil and gas and life sciences show the most intent to forge alliances.
In terms of acquisitions, according to the CCB, the sectors with the greatest appetite are oil and gas (59% of companies planning a deal), consumer products and retail (59%), power and utilities (58%), diversified industrial products (55%) and life sciences (51%).