Australasia Capital Confidence Barometer June 2017 ey.com/au/ccb 16th edition. M&A well above trend as corporates fast track growth

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1 Australasia Capital Confidence Barometer June 2017 ey.com/au/ccb 16th edition M&A well above trend as corporates fast track growth

2 In a time of geopolitical uncertainty and disruption, our 16th Capital Confidence Barometer finds Australasian corporate executives optimistic about global and local economic conditions. More than half of local respondents (56%) expect to pursue M&A in the next 12 months considerably above trend. Confidence in M&A has not been this high since the Barometer s launch in 2010, with one exception in mid The increase in deal confidence in Australasia is mirrored in the USA, where 76% of respondents are looking to undertake an acquisition in the US or globally. We see the US returning as a key driver in global deal making activity. It seems that geopolitical concerns have become the norm overshadowed by the more immediate and pressing issue of corporate growth. Executives are not waiting around to see how the uncertainties surrounding the Trump administration, or the Brexit shakeout, will affect their markets. Instead, they are responding to pressure from shareholders to deliver growth and from digital disruption to acquire new capabilities with deal making seen as key to succeeding on both fronts. The consensus seems to be that, while the road ahead may be bumpy, corporates are being driven to actively pursue acquisitions in competition with active private equity investors. For many companies, the planned M&A is seen as a fast route to future proof businesses against digital disruption a priority at the top of many board agendas. Do you expect your company to actively pursue mergers and acquisitions in the next 12 months? 66% 46% 41% 38% 40% 36% 35% 31% 31% 25% 20% 24% 35% 34% 30% 40% 56% 44% 59% 50% 53% 41% 5 average 39% 41% 55% 56% Oct Apr Oct Apr Oct Apr Oct Apr Oct Apr Oct Apr Oct Apr Aus and NZ Average 1 Capital Confidence Barometer

3 Key findings from local respondents EY Capital Confidence Barometer is a regular survey of 2,300+ senior executives from large companies around the world conducted by Euromoney Institutional Investor. The respondent community comprises an independent panel of senior executives and select EY clients and contacts. This report from our 16th Barometer, carried out in March and April 2017, provides a snapshot of our local findings from 121 executives in Australia and New Zealand in the context of global results. M&A outlook 98% 56% 3 59% expect local M&A markets to remain stable or improve expect actively pursue M&A in the next 12 months have 3 deals in the pipeline Macroeconomic environment 6 36% 60% think both global and local economies are improving local equity short-term local valuations improving market stability improving 25 points from Oct points from Oct 2016 Growth and portfolio strategy? 39% Key question for leaders: How can I future proof my business in an age of constant change and disruption? Creating an innovation culture is the most difficult part of digital transformation plan to automate more roles within the workforce Capital Confidence Barometer 2

4 Macroeconomic environment Australia and New Zealand executives are bullish about both their local economies and the global economic outlook, and increasingly confident about acquisitive growth strategies. Our survey reveals a resurgence of economic confidence and positive corporate indicators. The number of Australasian executives who think the global economy is improving has more than doubled in the last 12 months. The percentage of those feeling positive about their local economies has tripled since October In terms of potential constraints on growth, one in five local respondents believe that increasing government intervention in corporate decision making will be the greatest economic risk to their business. More executives are concerned about regulatory hurdles than about high volatility in currencies, commodities and other capital markets. Our respondents appear to accept that geopolitical and policy uncertainty is now a permanent feature of a globalised economy part of business as usual. Only 8% of local executives see uncertainty about US Government policy as a key economic risk; only 2% are concerned about economic and political instability in the European Union. Bolstering confidence, the majority of Australasian executives expect corporate growth to accelerate, credit to be readily available and valuations to improve. Strong certainty (95%) about short-term market stability means that companies should feel comfortable accessing capital markets to support investment and M&A strategies, with capital available to support growth agendas. What is your perspective on the state of the economy today? Local 35% 31% 6 21% % 28% 50% 52% 4% 28% 5% 41% Apr 17 Oct 16 Apr 16 Apr 17 Oct 16 Apr 16 3 Capital Confidence Barometer

5 Please indicate level of confidence at the local level? Corporate earnings Increasing government intervention in corporate decision making High volatility in currencies, commodities and other capital markets Restrictions on the free movement of employees/ barriers to travel Increasing global geopolitical instability Slowdown in global trade flows/increase in protectionism 3% 5% 46% 31% 3 51% 43% 26% 26% 3 Short-term market stability 35% 44% 35% 24% 33% 60% Oct 16 Apr 16 Oct 15 20% 19% Credit availability Uncertainty about US Government policy Cybersecurity threats Financial instability in China, including levels of corporate debt Economic and political instability in the European Union 45% 28% 26% 45% 36% 42% 10% 36% Equity valuations/stock market outlook Other 36% 8% 10% 8% 6% 4% 2% 5% 1% 0% 38% 41% 43% 26% 48% 44% What do you believe to be the greatest economic risk(s) to your core business over the next 6 12 months? (Select up to three) Macroeconomic environment Capital Confidence Barometer 4

6 Growth and portfolio strategy In the search for growth, future proofing remains an ongoing challenge. Local companies are looking to accelerate growth in their core business and via deal making, leading to regular portfolio reviews and major capital investment in growth strategies. Boardroom agendas are dominated by the impact of digital technology on business models, the search for growth and sector convergence. In response to the accelerating pace of change, 81% of local executives say they are reviewing their portfolios more frequently. Growth is also dominating the capital management focus, with companies investing the bulk of their attention and resources on organic and inorganic strategies. Capital allocation, optimising balance sheets and improving working capital management are less of a priority in the current environment. Of those looking for deals outside their sector, almost a quarter (24%) say they are looking for new products or service innovation the very types of deals where disruptive start-ups are likely to prefer structures that avoid wholesale acquisition. Which of the following will be most prominent on your boardroom thinking during the next six months? (Select up to three) Impact of digital technology on your business model; e.g., new sales channels/ markets, IoT, cybersecurity 21% 19% Impact of increase economic and politcal instability Identifying opportunities for growth, including M&A, JVs and alliances Chances in tax policy/rates 10% 8% Sector convergence/increased competition form companies in other sectors Portfolio analysis, including strategic divestment (spin-off/ipo) 9% Shareholder activism, including returning cash to shareholders Increasing regulatory or governmental intervention 6% 6% On which of the following capital management issues From where do you see growth within your company in is your company placing the greatest attention and the next 12 months? resources today? (Select up to three) Organic growth (e.g., investing in products, R&D, talent, innovation, digital) 28% Organic 58% 46% Inorganic growth (e.g., acquisitions, alliances, and JVs) Tax structure Strategic portfolio review/capital allocation 18% 19% M&A JVs Alliances 23% 22% 20% Apr 17 Oct 16 Optimizing balance sheets, improving capital structure working capital management to release cash 5 Capital Confidence Barometer

7 Growth and portfolio strategy What are the main reasons for entering an alliance or JV as opposed to a full acquisition? (Select up to three) Easier to pursue several options concurrently Brand recognition of the partner selected in the geography/product area Access to developed infrastructure/supply chains Regulatory requirements within the given market 9% 10% 8% 8% Lower risk/capital investment than a full acquisition Blocking a competitor from working with that partner in the future 4% 5% Faster access to innovation Sharing of capital investment in the market opportunity To maximize value of a non-core asset Access to talent 3% 3% 2% 2% Are local companies falling behind in digital transformation? Australasian respondents are struggling with digitising their operations. They believe that future proofing their businesses against disruption is the most important issue for leaders today. But local companies are more likely than their global peers ( vs. 24%) to see enabling a digital innovation culture as the most difficult part of digital transformation. They are also challenged with the potential for automation. Local workforce planning is more focused on shifting talent, relocating people to other geographies or creating new jobs than on automating roles within the workforce. Instead, 55% of local respondents are looking to sell or outsource routine functions within the next 12 months. It s an interesting move at a time when, for some organisations, robotic processing automation could offer the potential to carry out repetitive tasks faster, more accurately and at a cheaper price point than can be achieved with offshore workers. What is the most difficult part of digital transformation? With regards to employment, which of the following does your organisation expect to do in the next 12 months? (Select all that apply) Implementing and enabling a digital innovation culture through change management Leveraging digital best practice from acquired companies or successful competitors Understanding and delivering on changing customer digital expectations Establishing a common vision, strategy and clarity of plan in the organization 24% Shift skills and talent within our business Maintain current workforce size Relocate people to other geographies Create new jobs/hire people Reduce workforce numbers 20% 19% 22% Maintaining competitive position as competitors adopt new technologies 19% Re-skill/train our people to better respond to technology changes Fully capturing the cost saving and potential value creation of digital transformation Automate more roles within the workforce International Domestic Capital Confidence Barometer 6

8 M&A outlook Deal making is set for a strong 2017 with high confidence in the M&A market and healthy pipelines. Valuations are improving and the likelihood of closing remains high. With a limited number of acquisition opportunities in the local pool, we encourage Australasian companies to think gloabl in their growth strategies. Confidence in the local M&A market is at a record high, with 98% of respondents now believing the local M&A market to be improving or stable. Higher-quality, if fewer, targets are expected to come to market. Almost a third () expect to complete more deals in the next year. More than five in ten (82%) think asset valuations will increase or stay the same over the next 12 months. Confidence in closing acquisitions at a local level has improved in the last six months. More than half (53%) of the deals planned in the next 12 months are valued at less than US$250m, as companies look to undertake bolt-on deals to grow their businesses. Deal pipelines remain healthy: almost three in five (59%) of respondents have three or more deals in their pipeline. The majority of respondents (89%) expect these numbers to increase or remain stable. Key strategic drivers of locally planned M&A are growth in both share of existing markets and into new geographical markets. Also seen as key are the acquisitions of both technology and talent, as a strategy to combat the threats of technological disruption to business models. What is your local level of confidence in the following: Number of acquisition opportunities 26% Quality of acquisition opportunities 10% 36% 30% 38% 48% 60% 55% What is your expectation for the local M&A market in the next 12 months? 31% 39% 48% 51% 49% 21% 49% 38% 4 4 2% 4% 24% Apr 17 Oct 16 Apr 16 60% Likelihood of closing acquisitions 28% 21% 25% 61% 50% 51% 24% Apr 17 Oct 16 Apr 16 7 Capital Confidence Barometer

9 Move into new geographies Grow market share Acquiring technology or new production capabilities React to customer behavior Acquiring talent Acquiring innovative start-ups What are the main strategic drivers for pursuing acquisitions? (Select up to three) Secure supply chain % 3% 8% 10% 34% 2 2% 22% 0% 4% 4% 30% 26% 24% 25% 2 How many deals do you currently have in your pipeline, regardless of deal size? Number of acquisition opportunities 65% M&A outlook Apr 17 Oct 16 Apr 16 Considering the next 12 months, how do you expect your pipeline to change? Increase No change Decrease 23% 18% 41% 30% 2 48% 4 55% Apr 17 Oct 16 Apr 16 Capital Confidence Barometer 8

10 M&A outlook Top 6 sectors actively pursuing acquisitions in the next 12 months 1 Automotive and transportation 4 Oil and gas 2 Mining and metals 5 Technology 3 Financial services 6 Life sciences Top 5 investment destinations Companies are looking across a broad range of geographies, with a pivot toward developed markets. Local companies companies 1 Australia US 2 New Zealand China 3 US UK 4 China Germany 5 Japan Canada Australia (8) US the global centre of M&A Deal making intentions in the USA have growth significantly in the past 12 months. Confidence in the US and global economies, and the need for successful growth strategies, have dwarfed anxieties about the policy direction of the new administration. Markets have already priced in an anticipated reform of the corporate tax rate, which is currently one of the highest in the world. If the US makes its promised tax cuts, the repatriation of trapped cash by US companies could add a potential US$1t of firepower that may be used in deal making. This would provide greater competition for US-based assets, especially in life sciences, technology and consumer goods, but will also drive US companies outbound, as they look to operate in a new tax environment. 9 Capital Confidence Barometer

11 Contacts For a conversation about your capital strategy, please contact us: David Larocca EY Oceania Leader Transaction Advisory Services david.larocca@au.ey.com Jeremy Barker Consumer and Industrial Products Richard Bowman Real Estate Stuart Bright Valuations & Business Modelling Nick Cardno Energy David Clanchy Inbound Tim Coyne Financial Services Andrew Ettridge Middle Market Darrin Grimsey Government and Public Sector Grant Hodges New Zealand Ishwar Madhyastha Technology, Media & Entertainment and Telecommunications Peter Magill Mergers and Acquisitions John Matthews Infrastructure Advisory Paul Murphy Markets Leader and Mining & Metals Gary Nicholson Transaction Support Adam Nikitins Corporate Restructuring Daryn Saretzki Operational Transactions Services Gavin Sultana IPO Marcus Willison Real Estate Advisory Services Julie Wolstenholme Australian Diversified Business Bryan Zekulich Private Equity Reid Zulpo Transaction Tax contacts Steve Krouskos EY Vice Chair Transaction Advisory Services EY Limited steve.krouskos@uk.ey.com Follow me on Julie Hood EY Deputy Vice Chair Transaction Advisory Services EY Limited julie.hood@uk.ey.com Follow me on Capital Confidence Barometer 10

12 About the survey The Capital Confidence Barometer gauges corporate confidence in the economic outlook and identifies boardroom trends and practices in the way companies manage their Capital Agendas EY framework for strategically managing capital. It is a regular survey of senior executives from large companies around the world, conducted by Euromoney Institutional Investor Thought Leadership (EIITL). Our panel comprises select global EY clients and contacts and regular EIITL contributors. In March and April, we surveyed a panel of more than 2,300 executives in 43 countries; 58% were CEOs, CFOs and other C-level executives. Respondents 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. Surveyed companies annual global revenues were as follows: less than US$500m (21%); US$500m US$999.9m (23%); US$1b US$2.9b (); US$3b US$4.9b (10%); and greater than US$5b (). company ownership was as follows: publicly listed (62%), privately owned (), family-owned (3%) and government-/state-owned (3%). EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Limited, each of which is a separate legal entity. Ernst & Young Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. About EY s Transaction Advisory Services How you manage your Capital Agenda today will define your competitive position tomorrow. We work with clients to create social and economic value by helping them make better, more-informed decisions about strategically managing capital and transactions in fast-changing markets. Whether you re preserving, optimizing, raising or investing capital, EY s Transaction Advisory Services combine a set of skills, insight and experience to deliver focused advice. We can help you drive competitive advantage and increased returns through improved decisions across all aspects of your Capital Agenda Ernst & Young, Australia. All Rights Reserved. APAC No. AUNZ PH ED 1804 This communication provides general information which is current at the time of production. The information contained in this communication does not constitute advice and should not be relied on as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Ernst & Young disclaims all responsibility and liability (including, without limitation, for any direct or indirect or consequential costs, loss or damage or loss of profits) arising from anything done or omitted to be done by any party in reliance, whether wholly or partially, on any of the information. Any party that relies on the information does so at its own risk. Liability limited by a scheme approved under Professional Standards Legislation. ey.com/au/ccb