Despite the return of favorable conditions for mergers and acquisitions (M&As), a quarter fewer (29%) global businesses are actively seeking acquisition targets, in stark contrast to the appetite for deals six months ago (38%). The fall comes despite only 16% feeling restricted in their ability to pursue growth through M&As compared to 40% a year ago, according to a survey of over 1,000 senior executives around the world, by Ernst & Young.

The third bi-annual Capital confidence barometer, conducted in October, also finds greater optimism among executives about their own company and local economy prospects tempered by greater pessimism about the global picture. Austerity measures, increasing taxes, currency conflicts and regulatory concerns along with a slowing recovery among other issues are undermining confidence in the global economy and reducing the appetite for M&A.

Half of respondents now feel well positioned to execute an acquisition at short notice – up from 36% in 2009 – but more companies are reluctant to commit to a deal. The majority of those that are, look to acquire in emerging markets. There may be a drop in the appetite for M&A generally but we could see some bold first-mover activity given the fall in respondents saying they were likely or highly likely to make a divestiture over the next six months (down to 15% from 38% in April) was higher relatively, than the fall in buyers – increasing the gap between the number of potential buyers and willing sellers.

Rich Jeanneret, Americas Vice-Chair, Transaction Advisory Services at Ernst & Young LLP, says: “According to our findings, there’s tempered exuberance among executives around the globe. M&A is still very much on the agenda, but we’re noticing a bit of a wait-and-see pattern.”

“While confidence in the economic recovery has waned somewhat over the past six months, our survey shows firms are looking to put their cash to work organically as boardrooms take a more cautious approach. There’s less of a focus on top-line growth through M&A and a greater emphasis on performance improvement.”

Seventy-five percent of respondents are now focused on organic growth as their capital allocation priority, through restructuring and performance improvement, compared to 66% six months ago.

Emerging markets targeted

Most companies recognize the imperative for an emerging markets strategy to position them for future growth and plan M&A accordingly. A third (31%) said they were likely to undertake or seriously consider an emerging market acquisition in the next six months. By contrast, interest in developed markets acquisitions has remained flat over the last six months.

Over half of those who planned to invest in the emerging markets expect to enter via a joint venture or strategic alliances, which also show an upward trend.

Jeanneret says: “Our survey finds evidence of a ‘two–speed’ recovery as emerging markets are continuing to attract attention, even more so then they did a year ago while interest in developed economies has been flat. Companies are looking to take advantage of opportunities and resources in these growing economies.”

Credit conditions improve

Overall optimism is increasing for local economies, as 67% of respondents feel more confident about the prospects of their local economy compared in April. Levels of confidence in India (92%) and China (82%) remain high compared to six months ago, but former leader Australia drops out of the top five most confident economies. Russia (89% from 47% in April) and Germany (84% from 64%) enter the top five, while France (66% from 44%) has also seen a large rise in confidence.

In contrast, the outlook for the global economy is less optimistic, with 34% believing recovery will happen within the next 12 months, compared to 40% six months ago.

Steve Krouskos, Global and Americas Markets Leader, Transaction Advisory Services at Ernst & Young LLP, says: “Market confidence-made up of consumers, investors and credit markets-is the primary driver of deal activity.”

Over half (58%) said credit conditions were better now than in April. However, the global picture is patchy. Among the BRIC nations, the majority of executives said the situation had improved, but in the UK and US, only 33% and 47% respectively, see such an improvement.

Companies’ increasing ability to invest in their business is fortified by easing access to finance. Low rates have made debt markets increasingly attractive, and banks have been willing to work with borrowers’ circumstances.

Indeed, of the companies considering M&As, 61% are planning to fund deals with cash, while bank loans have increased too, other forms of debt and bonds have declined considerably.

As a result, 52% of companies have no need to refinance loans or other debt obligations, an increase of nearly 10% on April 2010. Of the 48% of companies that do need to refinance, 63% plan to do it within the next 12 months.

High risk – high reward

With many more companies now in a strong cash position they could well be placed to take advantage and make ‘all cash’ offers to shareholders. While buyers are likely to pay a premium now, in two years they may pay even bigger premiums.

There will be opportunities to make a game-changing strategic move – the risks may be high but so too are the rewards. How organizations manage their capital today will define their competitive position tomorrow.

About the survey

The Ernst & Young Capital confidence barometer is a survey of over 1000 senior executives from large companies around the world and across industry sectors. The objective of the Barometer is to gauge corporate confidence in the economic outlook, to understand boardroom priorities in the next 12 months, and to identify the emerging capital practices that will distinguish those companies that will build competitive advantage as the global economy continues to evolve. This is the third half-yearly Barometer in the series, which began in November 2009.

About Ernst & Young

Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 141,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.

Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information, please visit www.ey.com.

This news release has been issued by EYGM Limited, a member of the global Ernst & Young organization that also does not provide any services to clients.

SOURCE Ernst & Young

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