More than half of corporate companies globally are planning to pursue mergers or acquisitions (M&A) in the next year, professional services firm EY’s latest ‘Global Capital Confidence Barometer’ shows.
The firm says strong M&A intentions are fuelled by a search for talent and technology.
Of the 52% of global corporates planning to pursue deals, about 56% of executives plan to invest in technology through acquisitions, joint ventures or external venture funds.
About 66% of respondents plan to allocate more than 25% of their total investment capital to technology, particularly solutions that drive top-line growth.
Simultaneously, 61% of respondents are experiencing difficulties in securing the right skills and talent.
“In terms of investing in technology, the answer to the buy-versus-build question for most companies is tilting towards buy. At the same time, the shortage of talent is a constraint on growth and acquiring the skills needed to underpin future growth is increasingly part of the current M&A story,” says EY global transaction advisory services vice-chairperson Steve Krouskos.
The likelihood of a recession in the near- to mid-term is not considered a significant threat, with 54% of respondents not expecting an economic downturn.
However, while the majority of respondents from most major economies remain confident in their economic outlook, this is deeply contrasted in Germany, where 80% expect a downturn, and the UK, where 62% expect a downturn.
Despite these concerns, EY says the deal market in Germany and the UK has remained active this year.
EY further finds that executives in the US are the most bullish, with 78% of respondents discounting the chance of significant economic downturn in the near- to mid-term.
“Companies are managing through trade and tariff issues that could be perceived as undermining economic confidence. Sixty-four per cent of businesses are actively planning to mitigate the impact of trade and tariff issues in ways including reconfiguring supply chains and relocating production facilities.
“A further 22% are actively considering their options to respond to this fast-changing situation,” EY reports.
In the context of this bullish economic outlook, the deal market going into 2020 looks set to be highly competitive. Eight in ten respondents expect to see an increase in hostile and competitive bidding in the next year and 75% of respondents expect private equity to be a major acquirer.
Respondents expect increased megadeal activity, which are deals valued at more than $10-billion, with 55% of respondents foreseeing an increase in deals topping this mark.
Almost three-quarters, or 72%, of respondents do not anticipate any slowdown in M&A activity overall and 71% of corporate executives forecast an increase in cross-border dealmaking.
EY finds that the US is the preferred place for M&A investment globally.
Further, although Brexit uncertainty continues, the survey finds that the UK’s investment attractiveness has remained strong as investors rank it the second preferred investment destination globally.
The US and UK outpace Germany, China and Canada as preferred destinations for deals.
Krouskos says ongoing trade issues in a number of the major economies have not caused dealmakers to shelve plans. The imperative to transform outweighs the risk of uncertainty.
“As long as this continues, the drumbeat for M&A will go on. Deals continue to be powerful means to reshape portfolios and accelerate the transformation imperative facing CEOs.”
Meanwhile, EY reports that views from South Africa are less optimistic with regard to global economic growth.
“Local views on local economic growth have declined in the current survey, with notable key challenges being short-term market stability, credit availability for deals and equity valuations,” Krouskos explains.
In South Africa, respondents view the greatest external risk to the growth of their business as geopolitical or local political uncertainty, supply chain disruption caused by trade or tariff disputes and regulatory uncertainty.
But, encouragingly, local respondents believe the M&A market will improve in the next 12 months.
“Respondents expect to see increasing competition for assets in the next 12 months from both private capital and corporate buyers, as well as increases in M&A pipeline and closed deals, despite macroeconomic headwinds.
“Key drivers of South African M&A are as gateways to new markets, whereas global respondents use it primarily as a means of acquiring technology, new production capabilities or innovative start-ups,” Krouskos explains.
INVESTING FOR IMPACT
Purpose and social impact are rising on the boardroom agendas and are fundamentally reshaping the way companies measure success.
EY finds that about 84% of companies already have, or plan to have, social value reporting metrics in place for the next year.
“Business leaders are increasingly paying closer attention to investors’ demands to see evidence of broader responsibilities.
“They are recognising and responding to the need to be good corporate citizens, knowing that any business on the wrong side of this debate will likely find themselves on the wrong side of history,” Krouskos notes.Creamer Media Senior Deputy Editor Online