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Even with lots of funding available, and after a strong quarter for global deals, an E&Y survey shows far fewer firms willing to pull the trigger.
Roy Harris, CFO.com | US
October 28, 2010
Coming off a healthy third quarter for worldwide deals — and with funding easily available, and optimism about their businesses increasing — companies may seem ripe to take mergers and acquisitions to new levels. But Ernst & Young's Capital Confidence Barometer is predicting that global deal-making is likely to be far more modest than conditions suggest.
The reason? "There's tempered exuberance among executives around the globe," says Rich Jeanneret, E&Y's Americas vice chair, transaction advisory services. "M&A is still very much on the agenda, but we're noticing a bit of a wait-and-see pattern" as austerity measures, currency issues, and a rise in government regulation, among other things, undermine corporate confidence.
That explains why, in the accounting firm's view, only 29% of global businesses with executives participating in the biannual survey of 1,000 companies (260 of them in the United States) are actively seeking acquisition targets, down from 38% six months ago.
Making that fall-off most remarkable, though, is the interruption in M&A momentum that it could portend. Global acquisitions have been on a roll, scoring a 21% rise to $1.75 trillion in deals struck in the first nine months of 2010, according to Thomson Reuters. The third quarter was the best three months for M&A since Q3 2008. In the United States, the $595 billion of announced third-quarter deals — 5,760 of them — was up 18.6%.
The E&Y survey, taken in September, showed 58% of executives saying that credit conditions were better than in April. Access to capital has improved, they report, with 36% of respondents saying funding is no problem, up from 26% in the previous survey. Indeed, half of the respondents say they are well positioned to execute an acquisition on short notice — a rise from 36% answering that way in 2009 — even if active pursuit of deals was down.
"That is the conundrum," says Jeanneret. "I agree that the underlying fundamentals are good. But confidence has waned, and that's really not surprising when you look at the world economy."
In contrast to the growing global-acquisition worries, optimism in companies' own local economies is rising sharply, with the survey showing 67% of respondents more confident than they were for the last survey, and 73% more optimistic about their own corporate prospects. But the survey registers 75% of companies "now focused on organic growth as their capital allocation priority, through restructuring and performance improvement, compared to 66% six months ago."
E&Y finds easy access to finance fortifying this ability to invest internally, with 52% of companies having no need to refinance loans or other debt, a total 10% higher than it was six months earlier. Of companies that are considering M&A, 61% plan to use cash. While cash and bank financing as possible sources of funding are cited as rising, the use of other forms of debt and bonds has declined in popularity, the survey indicates.
Many of the global merger targets that do exist are in emerging markets. The survey shows 31% of companies are "likely to undertake or seriously consider an emerging market acquisition in the next six months." Most companies planning such an emerging-markets M&A strategy saw joint ventures or strategic alliances being their approach.
Jeanneret says "companies that have the courage to move right now will be rewarded" if they choose wisely. There is a greater degree of uncertainty in the United States, where currency-related and growth-related worries are on the mind of executives. "But I just got back from Brazil, and there's a robust feeling there, for example," he says. "Brazilian companies are looking for M&A."
Jeanneret says E&Y believes strongly in its 18-month-old barometer survey as "a real-time snapshot of corporate confidence — outlook for M&A and capital flows, as well as what boardrooms are coping with in general." He says he also likes "how well it tracks all the macro data; it's consistent with what's happening in the economy."