Growing optimism over the global economy is likely to lead to a marked pick-up in the number of mergers and acquisitions (M&A) over the coming months, a survey of executives found yesterday.
In its half-yearly report into the M&A sector, consulting firm Ernst & Young said it expects both the volume and size of deals to improve over the coming year, with 35 percent of companies surveyed likely to pursue acquisitions, compared with just 25 percent a year ago. The more favorable backdrop is attributed to growing optimism among executives.
“All of this is underpinned by growing confidence in a global economy on sounder footing — improving economic conditions in mature economies and more stabilization in the major emerging markets,” Ernst & Young M&A global head Pip McCrostie said.
Over the past few months, the sense of caution over the global economy has abated, particularly in Europe, where many countries have emerged — or are about to emerge — from recession. Fears of a Chinese slowdown have eased, while the US is still expected to post solid growth rates despite the recent budget stalemate that brought the world’s largest economy to the brink of default.
The survey found that 65 percent of executives expect the global economy to improve over the coming year, up from just 22 percent a year ago.
One encouraging finding of the survey is that companies are expected to use more debt and equity to finance deals as opposed to relying on cash. That suggests executives are more willing to take on risk.
Since the financial crisis that started in 2007 and 2008, and the ensuing recession, many companies around the world pulled back on risky investments and sought to rebuild their finances. That involved paying down debts and rebuilding their cash positions. Potentially risky undertakings such as M&As fell out of vogue and deal volumes and values slid sharply.
“Companies have weathered a prolonged period of uncertainty during which time they strengthened their balance sheets,” McCrostie said. “Having warehoused cash for a number of years and with ready access to credit, leading corporates are in a strong financial position to do deals — they now have more confidence to pull the trigger.”
The survey comes amid signs of a pick-up in the M&A market, which could be a boon to stock markets, as well as the many advisers and facilitators involved in such deals.
The most notable recent deal was Vodafone Group PLC’s sale of its 45 percent stake in Verizon Wireless to Verizon Communications for US$130 billion, which should be completed next year.
In addition, San Francisco-based pharmaceutical wholesaler McKesson Corp last week announced an agreed takeover of Celesio AG in a deal that values the German company at US$8.3 billion.
Ernst & Young found that the top five destinations for would-be dealmakers are China, India, Brazil, the US and Canada. Sectors expected to see the highest level of deals are life sciences, consumer products, automotive and technology, as well as oil and gas.
The survey was based on interviews with 1,600 senior executives from large companies around the world and across industrial sectors.