Capital Confidence Barometer

Transcription

1 April 2016 ey.com/ccb/technology 14th edition Technology Capital Confidence Barometer Tech dealmaking drive continues, and takes new shape, in 2016

2 Key findings Technology 84% 52% 57% 40% of executives expect economic stability or modest growth of tech execs see growing M&A, but this number is down sharply see the valuation gap increasing between buyers and sellers are planning alliances to create value from underutilized assets 2 Capital Confidence Barometer

3 Tech dealmaking drive continues, and takes new shape, in 2016 The global technology dealmaking landscape today is marked by the twin forces of digital disruption and a prolonged low-growth economy, according to EY s 14th biannual Technology Capital Confidence Barometer. Disruption drove tech M&A to new heights in 2015, with 95% of the tech executives we surveyed projecting similar or even greater volumes of mergers and acquisitions this year. At the same time, low-growth prospects are adding impetus to new kinds of tech alliances, beyond classic M&A and joint ventures, especially with the emergence of the sharing economy and what EY terms industrial mash-ups. Both of these digitally-enabled models reflect the need to do more with less to innovate and grow in sluggish times. In the sharing economy, that means realizing value from underutilized assets, as largely seen to date in the business-to-consumer (B2C) market. Industrial mash-ups further this model, as a new form of dynamic and increasingly automated partnering in the business-to-business (B2B) market. The imperative for optimal results under tighter economic conditions is, in fact, a theme running through this edition of the Barometer, in which tech executives show increasing deal discernment. Previously high-positive perceptions of such M&A fundamentals as the number, quality and closability of acquisition opportunities have diminished. More potential buyers are walking away from deals, especially because of issues uncovered during due diligence. Many actual buyers have been disappointed with deals not meeting expectations or delivering the intended strategic value. Tighter conditions are evidenced by lower levels of confidence among tech executives in corporate earnings, equity valuations, short-term market stability and credit availability. These factors have the potential to crimp resources for M&A. But corporate growth is not optional, particularly with shareholder activism rising on boardroom agendas. EY s Global M&A technology report for 1Q16 underscores the drive to continue dealmaking, with tech M&A volume rising 2% year-over-year (YOY) in the first quarter of And according to this report, deal pipelines remain robust. At the same time, 40% of tech companies surveyed are planning to enter alliances with other companies to help create value from underutilized assets. Industrial mash-ups intentionally forming, living and dying very dynamically, as determined by business need present the added value of avoiding the kind of post-merger executional disappointment this report highlights. Going forward, dealmaking will certainly continue to reshape the technology industry, but many deals are themselves being reshaped, to pursue growth more dynamically via alliances (mash-ups), as well as structurally (M&A). Jeff Liu Global Technology Industry Leader Transaction Advisory Services EY 3 Capital Confidence Barometer

4 Macroeconomic environment Tech companies accept reality of prolonged low-growth economy Many tech execs temper their economic optimism Having accepted that global economic growth is unlikely to accelerate in the near term, companies have been revising their strategies to enhance their revenues and protect their earnings. While 84% of tech executives see a stable or modestly improving economy, there has been a 38-point drop (to 1%) in those projecting strong improvement only six months ago. Economic and political instability, including the impact of the strong US dollar and weak oil prices, have tempered optimism. 84% of tech companies expect economic stability or modest growth 26% see commodity and currency volatility as the greatest economic risk Tech sector confidence has also receded in corporate earnings and capital markets. Fifty-seven percent of tech executives see corporate earnings as stable, but far fewer now have the positive growth outlook of six months ago (38%, down from 75%). The survey recorded similar drops in confidence in equity valuations (42% are now positive, vs. 56% in October 2015), the short-term market (47% vs. 74%) and credit availability (47% vs. 78%). 57% project stable corporate earnings 4 Capital Confidence Barometer

5 Corporate strategy Tech companies trend toward alliances Industrial mash-ups emerge in cost conscious times Cost reduction and regulatory oversight tie for the top boardroom concern in this Barometer (at 41%), given low economic growth and recent antitrust scrutiny of proposed megamergers. Both concerns also support a growing trend toward alliances, as companies look for less costly corporate growth strategies with fewer structural complications than M&A. The tech sector is seeing more sharing economy business models and what EY calls industrial mash-ups, a new form of dynamic and increasingly automated alliance-building that brings sharing economy benefits to the business-to-business (B2B) market (see EY report: Industrial mash-ups: a disruptive new partnering form will accelerate innovation again). 41% 40% of tech executives see cost reduction, regulatory oversight rising on boardroom agendas are planning alliances to create value from underutilized assets Cost concerns have also reduced hiring intentions in the tech sector, from 56% in October 2015 to 23% today. Even so, attracting and retaining talent was identified as the second-highest priority for driving growth (44%). The top tech sector priority was making better use of digital technology and analytics (53%). Notably, this same priority topped the list across all sectors (47%). 61% plan to keep current workforce size Capital Confidence Barometer 5

6 M&A outlook Deal fundamentals are mixed Valuation gap perceived as small, but growing Over half of tech executives (55%) see the gap in valuations between buyer and seller as 0%-10%, which could ease M&A negotiations for now. In the coming year, however, more than half see the gap growing. At the same time, nearly one-third (31%) see asset prices declining. 57% of tech executives see the valuation gap increasing in the near term. Increase 22% Remain at current levels 51% 76% 47% 57% 36% Decrease 7% 2% Apr 15 Oct 15 Apr 16 A spike six months ago in positive perception of deal fundamentals has subsided. % of positive attitude deal metrics 36% 42% 62% 42% 47% 75% 54% 68% 80% Apr 16 Oct 15 Apr 15 6 Capital Confidence Barometer

7 M&A outlook Tech M&A expectations ease but no sign of downturn Record 2015 tech M&A extends into 2016 Even after record-setting levels in 2015, tech M&A volume rose 2% YOY in the first quarter of 2016 to 1,002 deals, according to EY s Global technology 1Q16 M&A report. Quarterly value fell 14% YOY, but still ranked among the top 10 highest-value quarters ever. This Barometer shows that 43% of tech executives expect dealmaking to continue at a stable level this year, while 52% see it growing. In our last Barometer, fully 80% were projecting growth. 52% 43% 28% of tech execs see growing M&A, but this number is down sharply expect dealmaking to stabilize are driven by changes in customer behavior to pursue cross-sector deals Tech companies plan larger deals today; where only 1% planned US$1 billion-plus deals one year ago, 10% now express such intentions. A similar rise is found regarding middle-market deals of US$251 million to US$1 billion (37% now vs. 16% one year ago). Fewer are looking at deals any smaller (53% now vs. 83% a year ago). More have multiple deals in their pipeline now than a year ago (84% now vs. 47% a year ago). have two or more deals in their pipeline 84% Capital Confidence Barometer 7

8 M&A outlook Tech dealmakers increase scrutiny Many prepared to walk away from deals More potential buyers are walking away from deals (84% in this Barometer, vs. 71% in the last), especially because of issues uncovered during due diligence (27%). Many actual buyers have been disappointed with deals not delivering the intended synergies (20%) or strategic value (15%). Competition from other buyers appears to be waning: 18% of execs surveyed for this Barometer said competition has made them scuttle a deal, vs. 37% in the last Barometer. 84% 27% 20% of tech execs are prepared to walk away from deals that don t meet their scrutiny have walked away because of issues uncovered during due diligence of buyers say their deal didn t deliver intended synergies Downward pressure on earnings could be the culprit, as 44% of tech executives project more distressed asset sales. Among other deal trends expected to gain in prominence: greater competition from private equity acquirers (24%), hostile bids (21%) and outbound acquisitions from China (11%). expect there will be more distressed asset sales 44% 8 Capital Confidence Barometer

9 M&A outlook Tech execs see cross-border opportunities, risks Uneven global economic growth is driving companies to look for deals across the board, with 73% likely to pursue a cross-border acquisition within the next 12 months. At the same time, cross-border tax issues pose increasing risk, due to the ongoing implementation of the multilateral tax guidelines produced last year by the Organisation for Economic Co-operation and Development s base erosion and profit shifting project (OECD BEPS). With uncertainty surrounding this sweeping set of tax changes, 37% of tech execs are considering the implications for M&A, although they have not changed their planned acquisition strategy. 7 37% 41% 7% of tech execs have considered the OECD BEPS implications for their M&A, but not changed plans have not even considered the implications of the OECD BEPS guidelines for M&A have canceled a planned acquisition due to the new tax environment Top five investment destinations for sector United States United Kingdom India China Germany Dealmakers attracted to top-tier developed and emerging markets Stronger growth in the US and UK and the attractiveness of high-quality assets in Germany are making these countries popular destinations for investment. China (mainland) and India also remain attractive destinations for investors, notwithstanding recent concerns about the wider Asia-Pacific region s economic growth and stability. Capital Confidence Barometer 9

10 Contacts For a conversation about your capital strategy, please contact us: Global Technology Sector Greg Cudahy Global Leader TMT Technology, Media & Entertainment and Telecommunications greg.cudahy@ey.com Technology service line leaders Jeff Liu Global Technology Industry Leader Transaction Advisory Services jeffrey.liu@ey.com Transaction Advisory Services (TAS) technology contacts Ranjan Biswas India ranjan.biswas@in.ey.com Tim Dutterer Co-Leader Technology, Parthenon-EY tim.dutterer@parthenon.ey.com Staffan Ekström Global Telecoms Leader Transactions and TMT Leader, Nordics staffan.ekstrom@se.ey.com Ben Kwan TAS and TMT Market Segment Leader Greater China ben.kwan@hk.ey.com Simon Pearson United Kingdom spearson@uk.ey.com Barak Ravid Co-Leader Technology, Parthenon-EY barak.ravid@ey.com Channing Flynn Global Technology Industry Leader Tax Services channing.flynn@ey.com Dave Padmos Global Technology Industry Leader Advisory Services dave.padmos@ey.com Guy Wanger Global Technology Industry Leader Assurance Services guy.wanger@ey.com Arjan Groen Operational Transaction Services Netherlands arjan.groen@nl.ey.com David Hedley US Technology M&A Leader david.hedley@ey.com Neil Hutt United Kingdom nhutt@uk.ey.com Dr. Carsten F. Risch Germany carsten.risch@de.ey.com Eric Sanschagrin TMT Transaction Advisory, EMEIA esanschagrin@uk.ey.com 10 Capital Confidence Barometer

11 About the Capital Confidence Barometer 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 s framework for strategically managing capital. The Barometer is a regular survey of senior executives from large companies around the world, from many industries, conducted by the Economist Intelligence Unit (EIU). In February and March 2016, we surveyed more than 1,700 executives in 45 countries. In this survey, we had 182 respondents from technology companies, of which 55% were CEOs, CFOs and other C-level executives. Technology companies annual global revenues ranged from: less than US$500m (39%); US$500m US$1b (23%); US$1b US$3b (12%); US$3b US$5b (9%); and more than US$5b (17%). Our latest Global Capital Confidence Barometer continues to find a strong acquisition appetite together with a growing inclination to forge new alliances. Prolonged economic challenges are driving investment decisions and leading companies to ally and co-operate for growth as well as compete and acquire for market share. Connect with us at ey.com/ccb. Global company ownership was as follows: publicly listed (68%) and privately owned (32%). Capital Confidence Barometer 11

12 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 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 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 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. About EY s Global Technology Sector EY s Global Technology Sector is a global network of more than 21,000 technology practice professionals from across our member firms, all sharing deep technical and industry knowledge. Our high-performing teams are diverse, inclusive and borderless. Our experience helps clients grow, manage, protect and, when necessary, transform their businesses. We provide assurance, advisory, transaction and tax guidance through a network of experienced and innovative advisors to help clients manage business risk, transform performance and improve operationally. Visit us at ey.com/technology EYGM Limited. All Rights Reserved. EYG no. EYG no Gbl ED None EY-GTC This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. ey.com/technology