Appetite to acquire hits three-year high.
Companies' desire to do M&A is at a three-year high, with 40% of executives expecting to pursue acquisitions in the next 12 months. This is a clear signal of intent to look at deals as a route to growth. Dealmaking challenges still persist: just under half of executives are confident about the likelihood of closing acquisitions. This may be because of increasing rigor in the search for strategically aligned assets, more thorough due diligence and greater competition, according to Ernst and Young: Global Capital Confidence Barometer, October 2014 | 11th edition.
Executives see accelerating M&A market in the near term
An improving view of the resilience of the global economy, strong equity markets and enhanced corporate earnings have helped boost the outlook for M&A among respondents. While 2014 has been notable for high-profile megadeals, the Barometer suggests that middle-market M&A will provide a significant lift to deal activity. Almost two thirds of respondents expect deal volume to increase further in the next 12 months.
Bullish deal intentions as pipelines swell
The number of companies that have more than five deals in the pipeline has increased significantly. Renewed discipline in dealmaking is forcing companies to thoroughly examine many more investment opportunities to find the best strategic fit.
Stable valuations to enable dealmaking
Modest valuation gap and confidence in asset prices underpin positive deal sentiments.
There is a strong consensus among our survey respondents. Half of executives see only a small discrepancy between buyers' and sellers' expectations on asset valuations. This, combined with the outlook for stability in the valuation gap and the overall value of assets, will encourage dealmaking in the near term.
Dealmaking focuses on core business
Acquisition plans center on core
Companies are strengthening and expanding the core and assessing a range of transaction drivers - but cost efficiencies are paramount. The majority of companies are focusing on acquiring businesses in their core sectors, with an eye to boosting market share and margin growth.
Debt to fund future dealmaking
Balance sheet strength leads to drop in highly leveraged companies
Leverage has declined since the global financial crisis, thanks mainly to an increase in equity value.
The majority of companies in our survey report a debt-to-capital ratio of less than 25%, leaving them well positioned to withstand any near-term increase in interest rates.
Strong balance sheets leave room for debt
Nearly half of executives expect their companies' debt-to-capital ratios to increase over the next 12 months, indicating companies' willingness to take on more debt to fund growth ambitions. Those looking to decrease debt-to-capital ratios have more than halved since April 2014.
Download the full report: Capital Confidence Barometer - Global - October 2014