India’s leading M&A Advisors and Business Strategy Consultants
The recent wave of mergers and acquisitions (M&A) is set to continue with 59% of global companies now planning to acquire in the next 12 months according to a survey of more than 1,600 executives in 53 countries. This is the highest appetite to acquire recorded by the survey in its six-year history.
The surveyfinds an M&A market buoyed by record values in 2015 set for further growth in the next year. With global deal value up 35% on 2014 and more US$10b+ megadeals already announced in 2015 than in any previous year, the prospect of further growth in the M&A market looks certain. Four out of five executives (83%) expect activity to increase.
These positive sentiments are fuelled by their own burgeoning pipelines – which continue to expand, with 55% of companies now having three or more deals under consideration.
With modest increases in global GDP, organic growth alone is not enough for companies to expand and reshape at the pace they need. Technology and changing consumer preferences are disrupting business models and blurring sector boundaries. In that context, the search for growth is lifting deal-making to record highs – and executives are focusing on M&A to secure innovation, competitive advantage and market share for the foreseeable future.”
Acquisition appetite at a six-year high
The current deal environment is fostering M&A intentions. Executives are more confident than at any time in the past six years about the quality and number of deal opportunities and the likelihood of closing acquisitions.
Despite the high appetite to acquire, any fears about an overheating market can be tempered by strong rigor around deals. Executives are judicious about how they use M&A – almost three quarters (73%) have walked away from deals in the past 12 months because they were not fully aligned with their strategy.
Executives are taking a long-term view and evaluating deals more carefully than ever before. They are stepping back when necessary. This is not ‘a deals for deals sake mentality,’”
Sector convergence – a clear blurring of industry
The continuing convergence of industries looks set to accelerate deal making, with almost half (48%) planning cross-sector investments. Companies are looking to seize competitive advantage as new technology impacts everything from production to services.
Acquisitions into manufacturing segments were the most cited. Second was retail and wholesale, followed by government and public services acquisitions.
The sectors with the highest level of M&A intent are oil and gas (69%), consumer products (67%), mining and metals (67%), diversified industrial products (66%), and power and utilities (65%). Pharmaceutical sector is likely to see major M&A activity in the coming year with the consolidation of Indian pharmaceutical sector phase still going on and aspirations of Indian pharma companies on global market.
Cross-border deals dominate and dealmakers return to
Cross-border acquisitions look set to dominate the deals market, with 70% of respondents looking at non-domestic deals. Almost a third (29%) plan to focus on cross-border deals close to home, while 41% are looking further afield.
Compared to six months ago, more respondents (40% versus 35%) now plan to allocate at least 10% of acquisition capital to emerging markets. However, the majority of acquisition capital will be invested in developed markets. There is a significant increase (26%) in the number of executives now looking to acquire in the Eurozone.
Mature markets continue to drive M&A activity. With the majority of potential acquirers looking beyond their own domestic borders, there is a marked strengthening among executives around doing deals in the Eurozone. This is down to increased confidence in the stability of the region. The Eurozone also has a good supply of high-quality assets and attractive pricing due to currency fluctuations.
The US, UK, Germany, China and India are the overall top five investment destinations of choice. Brazil, the US, France, Germany, Australia and the UK look set to be the prominent acquirers.
Steadfast economic confidence supporting deal
Despite significant market volatility during the survey period, companies remain confident about dealmaking in the current macroeconomic environment. Economic confidence is steadfastly robust, identical to six months ago, with 83% of executives optimistic about the global economy. Long-term prospects for growth – albeit modest – are shaping views.
That is supporting strong corporate confidence, which is now more upbeat about creating new jobs, with almost half (45%) looking to hire talent compared to a third (29%) six months ago.
Companies do remain vigilant to potential challenges, including potential economic headwinds. A third (29%) of respondents view increased global and regional political instability as the biggest business risk. A quarter (24%) cite uncertainty associated with volatility in commodities and currencies. Interestingly, a greater number of executives (24%) see the economic and political situation in the Eurozone as a bigger risk than slowing growth in emerging markets (18%).
One danger that is almost universally recognized is cybersecurity around deals, with more than 90% of respondents viewing this as a significant risk to their deal processes.
The robust confidence in the global economy may come as a surprise to some. However, many of the executives now have years of experience operating through the worst economic environment in decades. Therefore, they are able to look beyond short-term volatility to longer-term growth opportunities.
M&A set to climb a sustainable path to growth
Steady corporate confidence, robust economic sentiments and disruptive sector convergence look set to fuel even more M&A activity in the coming year.
With all signs in the deal market pointing upwards, some question the trend and wonder if the market is overheating, however, executives are acting prudently as they look for growth. They are conducting more thorough due diligence and are prepared to walk away from transactions that do not meet their strategic goals.
“In short, M&A is becoming an essential tool for generating long-term value. It’s a critical part of a sustainable strategy to build the next decade’s platform for growth.”
(Courtesy: E&Y Survey 2015)