Reluctance for M&A persists despite improved market conditions

A global survey conducted by Ernst and Young revealed that only 29% of global businesses are actively seeking acquisition targets, in stark contrast to the appetite for deals six months ago (38%).

The fall comes despite only 16% feeling restricted in their ability to pursue growth through M&As compared to 40% a year ago.

The third bi-annual Capital Confidence Barometer conducted in October, with 1,000 senior executives participating, also found greater optimism among executives about their own company and local economy prospects tempered by greater pessimism about the global picture. Austerity measures, increasing taxes, currency conflicts and regulatory concerns among other issues are undermining confidence in the global economy and reducing the appetite for M&A.

Half of the respondents now feel well-positioned to execute an acquisition at short notice – up from 36% in 2009 – but more companies are reluctant to commit to a deal. The majority of those that are, look to acquire in emerging markets. There may be a drop in the appetite for M&A generally but we could see some bold first-mover activity given the fall in respondents saying they were likely or highly likely to make a divestment over the next six months (down to 15% from 38% in April) was higher relatively, than the fall in buyers – increasing the gap between the number of potential buyers and willing sellers.

Pip McCrostie, Global Vice-Chair, Transaction Advisory Services, at Ernst & Young, says: “Our previous barometer predicted the recent spate of large deals in August, but the appetite for M&A in the next six months has dropped. However, as large companies sit on growing cash reserves and their restrictions to do M&A ease, the pieces are in place for opportunistic and hostile approaches.Over the last year, boards have responded to ongoing uncertainty by improving their ability to respond quickly to opportunities that may arise. Yet boardrooms remain cautious, due to investor caution, regulatory and political changes – driving a greater focus on organic growth and performance improvement.”

In Singapore, a poll among over 30 corporate development officers and transaction leaders, who gathered at the Ernst & Young Transaction Leaders Forum held two weeks ago, showed largely positive and optimistic sentiments regarding the prospects for M&A activities over the next 12 months for Southeast Asian economies.

Many of the participants indicated “strategic acquisitions” as the principal driver of M&A activity over the next 12 months in Southeast Asia. However, misaligned price expectations and lack of suitable targets are some of the key constraints companies face.

Respondents from the poll also felt that deal sizes are likely to remain small (<US$100 million) at this point in time. However, a majority of them expect exit multiples for M&A transactions to increase over the next 12 months in Southeast Asia.

Harsha Basnayake, Singapore and Asean Sub-Area Leader for Transaction Advisory Services, Ernst & Young comments: “There is a growing sense of cautious bullishness among our clients in Southeast Asia, and that financing has gotten better. There is also an expectation that there will be a gradual increase in M&A activities with many of the private equity houses increasing their activities in many of our markets.”

“This is consistent with what we have noted in the global survey findings. Companies continue to look for inroads into the emerging markets where the growth outlook is more positive than in developed economies. Situated between India and China, Southeast Asia presents one of the best performing emerging economic regions that offer excellent opportunities for investment in relatively better risk profiled geographies,” Basnayake adds.
Crostie.