Despite 2018 being a notable year in terms of so-called mega deals, companies' appetite for M&A hits a four-year low. Deal plans are subdued in part due to regulatory and political uncertainties such as Brexit talks and the U.S.-China trade battle, according to a study released on Monday.
Only 46% of executives are planning to buy other firms in the next 12 months, the 19th EY Global Capital Confidence Barometer (CCB), a biannual survey of more than 2,600 executives across 45 countries found. That’s reduced from 56% of executives polled last year the New York-based consultancy said.
"Geopolitical, trade and tariff uncertainties have finally caused some dealmakers to hit the pause button. Despite stronger-than-anticipated first-half earnings and the undeniable strategic imperative for deals, we can expect this year to finish with much weaker M&A than how it started " Steve Krouskos, EY’s global vice chair of transaction advisory services, said in a statement.
The outcome of Brexit negotiations is a key concern for all executives surveyed. About 41% said that an Economic Free Trade Agreement similar to Switzerland’s is their preferred outcome of UK-European Union (EU) discussions, followed by 22% preferring Canada’s Free-Trade Agreement model. Just 5% of all respondents said they would prefer a second referendum of the UK’s EU membership — and only slightly more (6%) favour a World Trade Organisation rules-based outcome.
The EY report also highlights the impact of Brexit in relation to financial services. About 43% percent of executives participating in the survey stated they would be less likely to buy financial products and services from London-based providers when the UK leaves the EU.
Only a temporary slowdown in M&A
Though investment activity had soured somewhat strategic rationale for acquisition and macroeconomic fundamentals remained strong with 90% of company executives expecting the M&A market to improve and only 9% expecting it to remain stable in the next 12 months. The report said that the majority of those polled (85%) hold the view that economic growth prospects are improving, with only 2% predicting short-term market stability to decline and 2% predicting equity valuations to deteriorate.
“The good news is that companies will likely take the break in action as an opportunity to focus on integrating the many deals undertaken over the past 12 months. This is likely to be just a pause, not a complete stop. Fundamentals and the strategic rationale for deals remain strong, and the appetite to acquire will likely grow toward the second half of 2019” added Krouskos.
UK, the second-best spot for M&A destination of choice
Despite ongoing regulatory and political uncertainties, many companies are still planning cross-border deals to mitigate the potential impact of trade and tariff policies, with 20% of executives focusing more on international opportunities, including within the UK, which is the number two destination of M&A choice for executives, up from the fifth position in the firm's last survey in April 2018.
Overall, the top five investment destinations for executives participating in the survey, are the US, the UK, Canada, Germany and France.
“All of the top M&A destinations of choice are countries embroiled in trade uncertainties, suggesting that those companies planning deals are actively looking to get ahead of potential geopolitical disruption.” Krouskos, who has more than 25 years of experience in M&A-related work, explained.
Frequent portfolio reviews and divestments
According to the survey, companies are taking more time to review their portfolios amid the uncertainty. An increasing number of executives (40%) are reviewing their portfolios every six months compared with a half a year ago (27%). Companies from Japan (62%) and China (61%) cite this frequency more than other countries’ respondents. Just 33% of companies review their portfolios once a year or less, compared with 64% six months ago, with most of those respondents based in the US (58%) and the UK (43%).
As a result of portfolio reviews, nearly three-quarters of companies (73%) are likely to divest more assets going forward, according to the survey. Some divestments could attract private equity (PE) buyers, with 31% of participants expecting buyout firms to be major acquirers in 2019. Sixty-eight percent believe that the biggest competition they face for assets will come from private capital, including PE and corporate investment funds.
EY is a world leader in assurance, tax, transaction and advisory services. Respondents to the Global Capital Confidence Barometer represented 14 sectors, including financial services, consumer products and retail, technology, life sciences, automotive and transportation, oil and gas, power and utilities, mining and metals, diversified industrial products, and construction and real estate.