Capital Confidence Barometer

Transcription

1 November 2015 ey.com/au/ccb 13th edition Australasia Capital Confidence Barometer M&A pipeline gains momentum

2 M&A pipeline gains momentum EY s Capital Confidence Barometer is a regular survey of 1,600+ senior executives from large companies around the world conducted by the Economist Intelligence Unit (EIU). The respondent community is comprised of an independent EIU panel of senior executives and select EY clients and contacts. This report from our 13th Barometer provides a snapshot of our local findings from 140+ executives in Australia and New Zealand, in the context of global results. On the back of the highest global appetite to undertake acquisitive M&A activity recorded by the survey in its six-year history, our 13th Global Capital Confidence Barometer also sees Australasian companies on an upward acquisitive path. Uninterrupted by the change of political leadership in Australia, this bullish sentiment is being driven by low domestic growth expectations, continuing high-quality acquisition opportunities, low cost of capital and increasing confidence in the ability to close deals. With 53% of local executives expecting to actively pursue an acquisition in the next 12 months up from 4 six months ago Australasian appetite for M&A is on track to return to global levels. of Australasian 53% companies intend to acquire in the next 12 months ey.com/au/ccb #EYCCB Strong global appetite for M&A Key findings The Barometer finds a global M&A market buoyed by record values in 2015 set for further growth in the next year. With global deal value up 35% on 2014 and more US$10b+ megadeals already announced in 2015 than in any previous year, the prospect of further growth in the M&A market looks certain. Four out of five global executives (83%) expect activity to increase. 73% think the global economy is strongly improving 82% are positive about deal quality 83% have 3 or more deals in the pipeline 87% expect their pipelines to grow 85% will put organic growth efforts into innovation 2 Capital Confidence Barometer

3 M&A pipeline gains momentum Global deal values return to pre-gfc levels Globally, M&A deal values have returned to 2007 levels, although volumes have not returned to those heady times. EY modelling tracks a strong relationship between M&A values and gross domestic product, and indicates considerable headroom in the current cycle, particularly given expectations for continued low interest rates. We see particular upside if the eurozone returns to previous levels of deal making and China continues the currently observed theme of consumer-led growth. In addition, recent volatility and softening in equity markets mean that this deal cycle still has some way to run. In line with these findings, global and local appetite for acquisition continues to trend upwards, with a sustained recovery after dealmakers suffered a second post-gfc crisis of confidence. We expect current levels to be sustained over the next six months as investors continue to chase revenue and earnings growth. 10% 8% 6% 2% M&A/GDP Value (US$t) 5t 4t 3t 2t 1t Value US$t M&A value as % of GDP Do you expect your company to actively pursue acquisitions in the next 12 months? Expectations to pursue an acquisition 66% 61% 56% 59% 57% 46% 53% 41% 38% 40% 36% 35% 31% 31% 25% 29% 35% 3 32% 30% 40% 4 20% 2 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 AUS and NZ respondents Local executives optimistic about macroeconomic environment Australasian companies appear to have accepted conducting business as usual in an improving, but volatile, global economy and a lower growth local environment. 73% of Australasian companies believe the global economy is strongly improving compared with the consensus view of modestly improving six months ago. The rest of the world is also largely positive if less optimistic with only 36% expecting strong improvement in the global economy. More than 70% of local executives say continued currency and commodity volatility has been elevated on their boardroom agenda in the last six months. What is your perspective on the state of the global economy today? Australasian respondents Oct 15 1% 6% 7% 13% 73% Oct 15 1% 9% 7% 47% 36% Strongly Improving Modestly improving Stable Modestly declining Strongly declining Capital Confidence Barometer 3

4 M&A pipeline gains momentum In both countries, local sentiment about the local economy is also positive, with 80% of executives expecting at least a modest improvement. This positive sentiment may be partially driven by lower exchange rates, which are providing relief to exposed and export-oriented industries, such as tourism. Confidence in corporate earnings and short-term market stability has eased off slightly, but still remains high. This optimism can be seen in 72% of local executives allocating capital to growth, versus 55% for global players. Notably, local capital allocation is balanced evenly between organic and inorganic plays. The equity market appears to be fully priced given current corporate earnings expectations, with 6 of local executives expecting equity valuations to remain stable at the local level and 7 at the global level. This contrasts dramatically with expectations of six months ago, when 69% and 86% of executives were anticipating equity value improvements at the local and global level respectively. Growth uncertainty in China and associated global listed equity volatility over the last six months has led to a rapid slowdown in the number of IPOs being brought to market (both across Australasia and on a global basis). In the absence of further shocks, such as significant RBA rate rises, we anticipate a rebound in confidence around equity values in the next six months. New Zealand In New Zealand, executives are very positive on the state of both the global and local economies. The nation has acclimatised to ongoing evolution in Australia and China, and is embodying the Kiwi attitude of getting on with it. New Zealand executives are also asking bolder questions as they respond to changes in customer behaviour and globalisation. Survey respondents are more tilted toward innovation and change than their global counter-parts. With transformation on the agenda, talent will remain critical to growth success. Half of our New Zealand executives plan to create jobs and the rest intend to keep their workforce at its current size. Australia In good news for the Turnbull Government s central policy focus in Australia, more than twice as many companies are focusing on innovation to drive organic growth than they were six months ago. Now the buoyancy of the mining construction boom has dissipated, Australian companies are looking for growth by leveraging R&D and disruptive technologies. One of the challenges will be the ongoing fall in commodity prices, which is impacting Australia s trade flows, fiscal position and currency prospects. Every Australian business is impacted in some way by such a rapid currency depreciation. Although it was long foreshadowed, not all Australian corporates had implemented sufficient risk management or optimisation strategies given the length of time the AUD maintained parity. Organic growth plans point to innovation In terms of organic growth plays, the last six months have seen a major uptick in organisations planning to grow through R&D and innovative technology. Significantly more companies are putting their organic efforts into innovation 85% compared with 68% six months ago. To this point, on average, local executives intend to spend 20% of their available resources on innovation in the next 12 months. This level of resources planned for investment innovation is substantial, exceeding all current measures of spending on innovation. If executed, this investment of time and capital would result in a step-change in the way in which companies do business. After the GFC, many corporates that had previously become bloated on adjacent acquisitions adopted a return to core business strategy. Now, after several years of cost reduction, and risk averse board oversight, corporates are finding that, in a low growth world, top-line improvements can only be achieved by innovation. However, the question remains: how many corporates actually possess the DNA to invest and act in a truly innovative manner? What is the primary focus of your company s organic growth over the next 12 months? Australasian respondents Innovative Increase research and development/ 32% product introductions 15% Exploiting technology to develop 32% new markets/products 7% 12% Investing in new 21% geographies/markets 2% 12% Changing mix of existing 0% products and services Conventional More rigorous focus on core 15% products/existing markets 20% 46% Exploiting technology to develop 0% new markets/products 12% 22% Innovative Increase research and development/ 32% product introductions 22% % Exploiting technology to develop 25% new markets/products 8% 16% Investing in new 1 geographies/markets 3% 12% Changing mix of existing 0% products and services 30% 9% Conventional More rigorous focus on core 23% products/existing markets 23% 40% Exploiting technology to develop 6% new markets/products 1 17% Oct 15 Oct 14 Oct Capital Confidence Barometer

5 M&A pipeline gains momentum Australasian companies bullish on M&A pipeline With sustained M&A metrics continuing to bring vendors to market, local opinions about deal quality are exceptionally high, with 82% of executives positive about the quality of acquisition opportunities. For the first time since 2008, we are regularly seeing multiple bidder processes across a variety of industries as high quality businesses come to market. Those feeling optimistic about the likelihood of closing deals have increased from 75% to 85% in the last six months. As a result, pipelines are filling up, with 83% of executives now having three or more deals in the pipeline. Six months ago, only 2% of local executives were considering more than four deals now this figure has jumped to 35%. Looking ahead, this momentum looks set to continue. The data shows companies that returned to successful deal making in the last 12 months are hungry for more. Two-thirds of serial acquirers (those who acquired five or more companies last year) expect to do more than they did in the last 12 months. These serial dealmakers are accelerating their activity as vendors are attracted to market by an increase in unsolicited approaches from buyers. >= How many deals of all sizes do you have in your pipeline today? 2% 82% Australasian respondents 2% 3% 11% 10% 1 23% 25% 21% 30% 35% 36% 39% 45% Oct 15 Oct 14 Oct 13 Level of confidence at the local level in the quality of acquisition opportunities as seen by respondents in October % M&A doesn t just offer access to new products and services, distribution channels, customers and geographies. With growing numbers of Australasian companies planning to create jobs in the next 12 months and many of those jobs requiring new capabilities acquisitions are also being seen as valuable sources of proven talent. With regards to employment, which of the following does your organisation expect to do in the next 12 months? Oct 15 6% In the next year, 87% of Australasian companies expect their pipelines to grow and 71% expect to accelerate their deal activity far more than their global counterparts. Despite this, Australasian companies are facing greatly increased competition from foreign companies who are taking advantage of the lower Australian and New Zealand currency. 49% 45% Create jobs/hire talent Keep current workforce size Reduce workforce numbers That said, the majority of these deals will be small, bolt-on acquisitions. More than 90% of local executives say their largest deal size will be less than US$250m. 73% will be bolt-on acquisitions as companies consolidate to secure market share. Serial acquirers are back in the business of consolidating their competitors and smaller businesses in adjacent markets. We continue to observe that companies shouldn t be complacent about the ease of integrating even bolt-on deals. Local executives reported that, for acquisitions completed recently, the most significant issue that contributed to deals not meeting expectations was a failure to achieve synergies. That said, although the valuation gap may deter some dealmaking, the overall view of stability should offset downside risk. Most executives see the recent equity correction as temporary, indicating that asset prices will likely revert to previous levels. In the meantime, share-based deals will be encouraged as regional differences in valuations bring opportunities to the table. Credit availability may also be an issue for mid-market companies. Although 8 of local executives overall say that credit availability is improving, this result masks considerable disparity between the big end of town and smaller players. Barring an unexpected shock, the only obvious factor likely to temporarily put the brakes on is a growing valuation gap. Consistent with the perception of fully priced equity markets, 46% of local executives think that sellers have significantly (25%+) higher price expectations than buyers. Moreover, 55% believe this gap will only widen in the next year and 71% think that asset prices will increase. Capital Confidence Barometer 5

6 M&A pipeline gains momentum Analytics key to due diligence Within the deal process, local executives say digital technology has had greatest impact on due diligence. 63% say they are using analytics, big data, digital and social media due diligence. Bidders need their transaction diligence to address not just deal risks and negotiation points, but also to provide a diverse range of perspectives on the target business. Data analytics have enabled richer perspectives on deals and the ability to identify underlying issues, which were previously unseen in masses of inaccessible data. What part of your deal process has been most affected by advances in digital technology? Australasian respondents Due diligence (including analytics,big data, digital and social media diligence) Post-merger integration There has been no impact 7% 26% 63% Top 10 investment destinations Stronger growth in the United States and the United Kingdom and the attractiveness of high-quality assets in Germany are making these countries popular investment destinations. China and India also remain attractive destinations for investors. Globally, Australia is ranked six. Sourcing and selecting opportunities Post-merger integration Due diligence (including analytics,big data, digital and social media diligence) 3 40% Sourcing and selecting opportunities 17% There has been no impact 9% M&A by sector The food bowl of Asia theme has vaulted the agriculture sector and food services acquisitions to the top of the wish list for many deal hunters. However, industry fragmentation, lack of scale and deal inexperience are providing challenges in this space. Next to agriculture, consumer/retail and life sciences show the strongest acquisitive appetite. This is in sharp contrast to the global market, where oil and gas, and mining and metals top the charts presumably buying up Australasian assets, with weak commodity prices contributing to opportunistic deal activity at the bottom end of the cycle. Convergence and digital blurring of sectors appear to be spurring companies to consider cross-sector M&A, with 29% of local and 48% of global organisations planning acquisitions outside their own industry. Of the local companies planning cross-sector M&A, 57% are being driven to do so by changes in customer behaviour and 30% are seeking access to new materials or production technologies. Developed markets remain safe haven for offshore acquisitions In terms of offshore acquisitions, Australasian companies are considering targets in all locales. However, fewer local executives are intending to invest in emerging markets, with 72% saying they will allocate less than 10% of their acquisition capital to emerging markets in the next 12 months. Most Australasian companies are targeting English-speaking markets for their international expansion, with recent global volatility leading to diminished appetite for this type of risk. That said, almost half of local executives say they have increased plans to acquire assets in the eurozone, fuelled in part by pent-up demand and attractive pricing after an extended period of instability. About this survey The Global 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 s framework for strategically managing capital. It is a regular survey of senior executives from large companies around the world, conducted by the Economist Intelligence Unit (EIU). Our panel comprises select global EY clients and contacts and regular EIU contributors. In August and September, we surveyed a panel of more than 1,600 executives in 53 countries; more than 50% were CEOs, CFOs and other C-level executives. Respondents represented 19 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 (1); US$500m US$999.9m (25%); US$1b US$2.9b (2); US$3b US$4.9b (11%); and greater than US$5b (26%). Global company ownership was as follows: publicly listed (65%), privately owned (31%), family-owned (2%) and government/state owned (2%). 6 Capital Confidence Barometer

7 Contacts and About this survey Contacts For a conversation about your capital strategy, please contact us: Global Oceania Pip McCrostie Global Vice Chair pip.mccrostie@uk.ey.com Follow me on Julie Hood Oceania Managing Partner julie.hood@au.ey.com Editorial team Paul Murphy Oceania Markets Leader paul.murphy@au.ey.com Steve Krouskos Deputy Global Vice Chair steve.krouskos@uk.ey.com Follow me on Gary Nicholson Partner gary.nicholson@au.ey.com Jeremy Barker Partner jeremy.barker@au.ey.com David Clanchy Partner david.clanchy@au.ey.com Services leadership team Julie Hood Oceania Managing Partner julie.hood@au.ey.com Paul Murphy Oceania Markets Leader paul.murphy@au.ey.com Andrew Taylor New Zealand Markets Leader andrew.taylor@nz.ey.com Stuart Bright Valuations & Business Modelling stuart.bright@au.ey.com David Larocca Infrastructure Advisory david.larocca@au.ey.com Peter J Magill Mergers and Acquisitions peter.magill@au.ey.com Gary Nicholson Transaction Support gary.nicholson@au.ey.com Vince Smith Corporate Restructuring vince.smith@au.ey.com Tony Wiedermann Operational Transaction Services tony.wiedermann@au.ey.com Marcus Willison Real Estate Advisory Services marcus.willison@au.ey.com Capital Confidence Barometer 7

8 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 organisation, and may refer to one or more, of the 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 about our organisation, please visit ey.com. About EY s 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, optimising, raising or investing capital, EY s combine a unique set of skills, insight and experience to deliver focused advice. We 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 ED None M 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