Board executive appetite for M&A has fallen by 50 per cent year on year as the economic turmoil and eurozone woes have forced attention on bottom-line performance improvements rather than growth.
According to Ernst & Young's capital confidence barometer, which surveys over 1,500 senior executives globally, 21 per cent highlighted low confidence in the business environment and 20 per cent pointed towards the gap between buyer and seller expectations as the primary reasons for not pursuing deals.
The survey also found a sharp decline in companies planning to divest in the next 12 months, from 38 per cent in April to 15 per cent today.
“Despite having large cash stock piles and adequate access to capital, executives are waiting for a sustained recovery before engaging in M&A – they are more reluctant to make a move in this economic environment of low or stagnant growth,” explained Mark Gregory, Ernst & Young’s chief economist and transaction partner.
“Our analysis suggests that deal volumes are 30 to 40 per cent below the level we would expect given current stock market valuations. This may in part be explained by the impact of QE on market price levels but it does appear that there is a real lack of appetite for risk,” added Gregory.
“Consolidation of existing business and managing closely the factors that can be controlled to preserve shareholder value is the focus of the majority of executives in the current environment,” commented Rhys Phillip, head of M&A at Ernst & Young in the UK.
The proportion of companies that say they have been affected by the eurozone crisis rose to 93 per cent. Only 18 per cent believe the global economic situation is improving compared to 51 per cent six months previously, while 82 per cent have seen no improvement since then. The percentage of companies that reported declining sentiment rose from 19 per cent to 34 per cent.
The UK is in the doldrums with 39 per cent of domestic executives believing that the state of the economy is in decline, compared to only 20 per cent globally. This finding comes as little surprise as the IMF today downgraded the UK's growth prospects, predicting a 0.4 per cent contraction – down from three months ago when growth of 0.2 per cent was predicted.
With suppressed M&A sentiment, even those seeking acquisitions have modest aspirations. Nearly 50 per cent said they will do deals worth $50m (€38.6m) or less and 30 per cent between $51m and $500m.
“The deals that are happening are strategic, focused and generally smaller in size,” explained Phillip.
“The economic outlook is not going to improve significantly in the medium term. Companies must adjust their strategies and decision criteria to reflect the future economic reality, not that of the past. In a market like this, where good opportunities exist for those corporates with an eye for a deal, fortune will favour the brave. Value is not going to be created by waiting for a major upturn that is a long way off,” concluded Gregory.