Is your portfolio fit for the future or fashioned on the past?

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1 Australasia Global Capital Confidence Barometer May 08 8th edition Australasia highlights ey.com/au/ccb Is your portfolio fit for the future or fashioned on the past? Businesses are reshaping for a better tomorrow through portfolio transformation.

2 Key findings Macroeconomic environment and M&A outlook 65% 78% see the local economy think the local M&A market as improving is improving 6% see an increase in cross-border deal making Growth and portfolio strategy 8% say that portfolio transformation is prominent on their boardroom agenda 75% identified an asset to divest during their recent portfolio review 7% undertaking more frequent portfolio reviews are responding to digital threats External environment 6% say increased infrastructure spending will have a positive impact on growth 74% cite political uncertainty as a key risk to their business 8% are encountering issues in determining how to utilise contingent workers EY s Capital Confidence Barometer is a regular survey of more than,500 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 8th Barometer, carried out in March and April 08, provides a snapshot of our local findings from 44 executives in Australia and New Zealand in the context of global results. Australasia Capital Confidence Barometer

3 Record M&A confidence continues as executives plan portfolio transformation Our 8th Global Capital Confidence Barometer finds Australian and New Zealand executives increasingly confident about M&A markets as companies look to transform their portfolios largely through divestment and private equity competes with trade buyers for quality assets. Despite 74% of local executives being concerned about political stability double the number six months ago there is unprecedented optimism in the state of the global and local economy. 00% of Australian and New Zealand respondents think the local and global economy is either stable or improving, with the vast majority (97%) of all respondents anticipating a stable or improving capital market. More than 90% think that corporate earnings will improve, compared with 64% six months ago. Similarly, six months ago, % of respondents thought equity valuations were about to decline, compared with just % in the current Barometer. Transformation plans are being driven by the opportunities offered by new technology, as well as the threat from more digitally savvy competitors and start-ups. Recent portfolio reviews have seen 48% of respondents identify an asset at risk of disruption, with plans to divest at speed. This echoes the findings of the EY Global Corporate Divestment Study, which found Oceania divestment plans for the next two years jumping from % in 07 to 86% today. However, executives are continuing to be disciplined in their dealmaking, with the vast majority (9%) saying they have failed to complete or walked away from a deal in the past months due to concerns over transaction prices. Almost half believe the biggest risk to dealmaking will be a lack of high quality assets. If corporates do divest businesses, as predicted in EY s Global Divestment Study, then the call for acquisition opportunities may be answered. David Larocca EY Oceania Transaction Advisory Services Leader Australasia Capital Confidence Barometer

4 Macroeconomic environment Confidence in the macroeconomic environment is stronger than ever overseas and at home. Our survey found strong optimism in the state of both the global and local economies, with 00% of Australian and New Zealand respondents believing both the local and global economies are either stable or improving. That said, while no one is expecting local conditions to decline, the proportion of executives who believe they will improve has fallen from 7% to 58% in the last six months. Around the world, executives are bullish on the state of the global economy, with the Barometer s macro indicators the strongest they ve been since the 008 global financial crisis. Locally and globally, the Barometer s capital market measures registered record-high confidence ratings. More than 97% of all respondents see the outlook for global and local capital markets as stable or improving across: corporate earnings, credit availability, short term market stability and equity valuations. Strong expectations of infrastructure spending Part of this confidence may be due to 99% of local respondents expecting increased government spending on infrastructure in the next months. Executives anticipate this infrastructure investment will have a multiplier effect on GDP and corporate growth. Four in five (8%) of local executives say it will either increase, or be critical to, growth. Asked where this investment should be focused, our respondents are hoping for new technology infrastructure and improved transport infrastructure. Increased concerns over political uncertainty However, respondents also report risks to their core business and their investment decisions. Despite being confident about infrastructure spending, political uncertainty (74%) is seen as the leading risk to business growth a finding that has doubled in the last six months. This is perhaps not surprising given the relatively new government in New Zealand and ongoing political uncertainty in Australia. Executives also see geopolitical tensions and changes in trade policy and protectionism as pressing near-term risks for both the global and local economies. Rising inflation back on the executive radar After several years of persistently local inflation, local and global executives now see rising inflation as the top risk to their investment plans. From a longer-term perspective, the re-emergence of inflation poses the biggest risk to investment plans. Executives are starting to factor future scenarios of higher inflation into the investment planning processes. What is your perspective on the state of the Global economy? Local economy? Aug-8 Oct-7 Apr-7 Australasia Capital Confidence Barometer

5 Macroeconomic environment What is your perspective on the state of the Level of confidence at the local level Corporate earnings Credit availability Short-term market stability Equity valuations Aug-8 Oct-7 Apr-7 What do you believe to be the greatest near-term risk to the growth of your business?* What is the bigger risk to your current investment plans? Political uncertainty Geopolitical tensions Rising inflation Market volatility Changes in trade policy and protectionism Currency fluctuations Currency movements Interest rate hikes Disruptive forces, including technology, digital transformation, sector blurring and changing customer behaviors (percent) 6 *Respondents were only able to select up to three options. Only top five risks displayed and results reflect the percentage that chose each risk. AUS and NZ Global AUS and NZ Global Where should government infrastructure spending be focused? transport infrastructure 6 6 Building new technology infrastructure 6 9 Public services infrastructure (schools, hospitals) 9 Housing/home build programs 5 6 AUS and NZ Global Australasia Capital Confidence Barometer

6 Growth and portfolio strategy Local companies are seeking rapid portfolio transformation, with many plans for divestments, in response to the ongoing threat posed by digital disruption and start-ups. Four in five local executives cited portfolio transformation both buying and selling assets as the most prominent feature of boardroom thinking in the next six months. In terms of technologies already on the boardroom agenda, the top two are: cloud computing and big data (47%) and AI and robotic process automation (4%). Only % of local boards are currently considering blockchain. Of the third who are reviewing their portfolio more frequently than three years ago, 7% say this is being driven by the threat from digitally enabled competitors and start-ups. Major uptick in intentions to divest Local executives say that divestitures will be a critical component of successful portfolio transformation in the next months, as companies look to raise capital to fund technology-driven changes. As the result of their most recent portfolio reviews: 48% of local respondents say their business have identified an asset at risk of disruption to divest; and 7% identified an underperforming asset to divest. In terms of acting on these findings, speed is of the essence: 95% of local executives are looking to achieve their divestment and acquisition objectives in the next months to catch up to competitors. The Barometer echoes the findings of the EY Global Corporate Divestment Study, which found the number of Oceania respondents planning to complete a divestment in the next two years jumping from % in 07 to 86% today. The fundamental divestment driver, cited by 8% of Oceania companies, was a business unit s relative weak competitive position in its marketplace. Two-thirds of respondents said the changing technological landscape is directly influencing their divestment plans. Private equity waiting in the wings Current dealmaking conditions make this an opportune moment to divest, with a solid economy and readily available credit. Private equity (PE) is also expected to have a healthy appetite for divested assets, with 5% of local respondents seeing the return of PE as a major acquirer a top M&A theme for the next months. To this point, of those expecting to see increasing competition for assets in the next year, 5% expect it to come from PE. We believe these respondents will be proved right. Record dry powder within local PE and an increased focus of global PE on raising local funds suggests that corporate executives can expect increased competition from PE for quality assets. Current dealmaking conditions make this an opportune moment to divest, with a solid economy and readily available credit. 4 Australasia Capital Confidence Barometer

7 Growth and portfolio strategy Which of the following will be most prominent on your boardroom thinking during the next 6 months?* Portfolio transformation buying and selling assets to reshape your portfolio for the future Impact of increased economic and political uncertainty Shareholder activism including returning cash to shareholders 6 Increasing regulatory or government intervention 4 8 Impact of digital technology and transformation to our business model/threat of digitally enabled competitors *Respondents were able to select up to three options. Only top five risks displayed and results reflect the percentage that chose each risk. AUS and NZ Global How frequently are you reviewing your portfolio? Continously 4 Every quarter Every six months 7 44 Annually Less frequestly than annually AUS and NZ Global As a result of your most recent portfolio review, what was the main action taken? We identified an asset at risk of disruption to divest 9 48 We identified an underperforming asset to divest 7 We identified areas where we need to make acquisitions 7 4 We differentially invested capital in a particular business unit 5 We did not take any specific actions 6 We rebalanced capital allocation across the whole portfolio 4 AUS and NZ Global Australasia Capital Confidence Barometer 5

8 Human capital transformation Local companies are finding it challenging to adapt their workforce to the changing competitive and technological landscape. Integrating contingent workers successfully is now the most pressing workforce issue. As portfolios and business models become more agile, fluid and responsive to change, local executives are finding it more challenging to secure the right mix of workers. In October 07, 5% of local companies were intending to increase their use of contingent workers. Today, 8% of respondents said they were finding it challenging to determine how to use a contingent workforce. The increasing use of more flexible workforce models raises complex issues and may expose companies to financial and reputational risk. The need to protect intellectual property (IP), continuity of operations, and build and retain institutional knowledge also comes into play. However, with relatively low levels of local unemployment, 4% of executives say their organisations are struggling to identify and hire people with the right skills. An equal number are finding it difficult to reskill their existing workforce to better respond to technology changes. In this situation, contingent workers may be the fastest answer to upskilling for digital, suggesting that local companies need to solve the conundrum of getting the most out of giggers. Which of the following workforce issues is your organisation encountering?* Determining how to utilise contingent workers 66 Problems in identifying and hiring people with the right skills 4 55 Difficulty in reskilling our existing people to better respond to technology changes 4 4 Restrictions on the cross-borded movement of workers 5 Deciding on if/when to outsource particular functions 7 *Respondents were able to select all options that applied. Only top five risks displayed and results reflect the percentage that chose each risk. 8 AUS and NZ Global Contingent workers may be the fastest answer to upskilling for digital, suggesting that local companies need to solve the conundrum of getting the most out of giggers. 6 Australasia Capital Confidence Barometer

9 M&A outlook Confidence in the global and local M&A markets is going from strength to strength. But local executives are holding firm on deal making discipline even as the M&A market accelerates. The vast majority of executives expect the global and local M&A markets to improve over the next months. This confidence is also signalled in anticipated increases in pipelines and deal closures over the next year. More than two-thirds (69%) of local respondents expect their pipelines to increase a markedly more optimistic result than 49% six months ago. Similarly, 65% expect to complete more deals than in the last year. However, we are not seeing a willingness to acquire at inflated multiples. More than 90% of local respondents walked away from deals in the last year due to transaction price concerns. Almost half (46%) believe the biggest risk to dealmaking in the next months will be the lack of high-quality assets. It all points to our view that the market is robust but not overheating. Fears of regulatory intervention More than a third (5%) of local executives believe government and regulatory intervention will be a major potential risk to dealmaking. A number of countries are looking to bolster their ability to block takeovers, primarily from abroad, using national security or national interest provisions. Dealmakers must factor in changing political sentiment when assessing targets. The way regulators assess deals is also evolving. Previously, it was simply a matter of market share. Now competition authorities are examining other factors, such as combined research and development strengths or access to and control of data. Cross-border deals and PE dominate M&A themes Despite fears of greater protectionist actions by governments, executives still expect cross-border M&A to be the major theme of M&A in the next months, with 6% of respondents citing this as the main theme up from 9% six months ago. For many companies, dealing in a globalised market is a necessity. Technology is connecting companies with customers across the globe and growth plans are no longer countrycentric. Local executives also expect a strong presence of PE in the deal markets. This trend began to accelerate in 07 and has continued in 08. Deal size involving PE is on the increase, as well as more instances of PE and corporates collaborating on deals across many sectors and geographies. Executives are becoming increasingly open to buying across traditional sector lines. With convergence a major driver, executives expect to see more cross-industry and cross-border deals in the near term. In the next months, what is your expectation for the... Local M&A market? Global M&A market? Aug-8 Oct-7 Apr-7 Aug-8 Oct-7 Apr-7 Australasia Capital Confidence Barometer 7

10 M&A Outlook How do you expect your M&A pipeline to change? Increase No change Decrease 0 Aug-8 Oct-7 Apr-7 Considering the next months, what is your expectation for the number of deal completions by your company compared with the past year? Increase No change Decrease 9 7 Aug-8 Oct-7 Apr-7 What will be the main themes of M&A in the next months? An increase in cross-border dealmaking 6 0 A return of private equity as a major acquirer of assets 5 0 An increase in cross-sector M&A driven by technology and digital 4 8 An increase in hostile and competitive bidding 9 0 A return of megadeal M&A activity 5 A slowdown in M&A activity 9 AUS and NZ Global 8 Australasia Capital Confidence Barometer

11 M&A Outlook Top 6 sectors actively pursuing acquisitions in the next months The top sectors pursuing acquisitions are those where convergence, consolidation and digital growth opportunities are highly pronounced. Looking at the top three, digital convergence is redefining the health care sector, transforming care delivery and system performance. For telcos, the addition of content, advertising and IT capabilities remains squarely on the M&A agenda. Meanwhile, mainstream financial institutions are embracing fintech in a bid to fend off competition from non-traditional financial services providers, like telcos, retailers and the tech giants. Healthcare Telcos Financial Life sciences Industrials Power and services utilities Top 5 investment destinations Australian and New Zealand respondents continue to invest in key developed and emerging economies. Of our two new Top 5 entrants: Malaysia continues to be seen as a stable investment gateway to tap into the Southeast Asia market Vietnam, is gaining favour due to economic improvements political stability, stable exchange rates, low inflation and strengthening trade ties with Australia. Looking at the intentions of global companies, regardless of heightened protectionism, companies are increasingly looking across the globe for innovative assets and access to new customers. In 06 just 8% of respondents were looking outside their domestic markets or own region to do deals. The increase to 6% of respondents in 08 shows not only the imperative to look everywhere for the right assets, but also the comfort that executives feel in dealing in a global marketplace. Surprisingly, despite tightening oversight on inbound acquisitions, the US remains the clear destinations of choice for global executives, perhaps on the back of tax reforms. Local companies Global companies Australia US New Zealand Brazil US Canada 4 Malaysia 4 China 5 Vietnam 5 UK Australasia Capital Confidence Barometer 9

12 Key takeaways The critical questions local executives should ask themselves to drive better M&A in today s deal economy. Is walking away the best deal you ever made? The deal landscape is highly competitive and the competition looks set to intensify further. But executives are making shrewd judgments based on strategic rationales supported by better information. The use of new tools and technologies to assess available data from multiple sources will determine deal fitness. Will private equity be your keenest competitor? Private equity (PE) funds are investing more and more for the medium and long term. They are also returning to the M&A market with significant purchasing power. Corporate executives should be prepared for increased competition for assets. Can your deal strategy navigate the rules or will regulation rule your M&A? The growth imperative means companies will remain focused on accessing new markets or acquiring innovation. An early understanding of regulatory implications in terms of how you shape the deal such as subsequent asset sales to meet competition or antitrust requirements could give you a competitive advantage. Is your portfolio fit for purpose? In the warp-speed world of business today, you must be able to proactively respond quickly to emerging opportunities and threats. Regular portfolio reviews will determine which nearterm M&A options are the fastest way to respond to external threats and reshape the future direction of your business. How are you managing your macroeconomic risks? With inflated confidence in the economy, but lingering concerns about the trajectory of inflation and market volatility, in particular, how are you insulating your business against these dynamics? Are you prepared for a rainy day? Confidence in the macro economy is at near record levels, with executives seeing macro volatility as the new normal. But if macro disruption significantly altered business and consumer sentiment, would your business be able to respond? Is the future of your capital fundamentally predicated on continuing market conditions? Is your future success contingent on your workforce? Amid rapidly changing portfolios and business models, the war for talent has never been more fierce. The right skills are often in short supply. Reskilling existing workers or hiring contingent workers are options; however, companies are finding them challenging to execute. Using M&A to secure talent is one way to respond, but executives should be sure that integration strategies capture the most value from human capital. 0 Australasia Capital Confidence Barometer

13 Contacts EY Contacts Global Steve Krouskos Global Vice Chair Transaction Advisory Services EY Global Limited Follow me on Julie Hood Global Deputy Vice Chair Transaction Advisory Services EY Global Limited julie.hood@uk.ey.com Follow me on Asia-Pacific Harsha Basnayake Asia-Pacific Area TAS Managing Partner harsha.basnayake@sg.ey.com Oceania David Larocca Oceania TAS Leader david.larocca@au.ey.com Greater China Erica Su Greater China TAS Leader erica.su@cn.ey.com ASEAN Vikram Chakravarty ASEAN TAS Leader vikram.chakravarty@sg.ey.com Korea Ki Whan Jung Korea TAS Leader ki.whan.jung@kr.ey.com FSO Charlie Alexander Global and Asia-Pacific FSO Leader charlie.alexander@hk.ey.com New Zealand Grant Hodges NZ Infrastructure & Transactions Leader grant.hodges@nz.ey.com Australasia Capital Confidence Barometer

14 About the 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 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 over,500 executives in 4 countries; 64% were CEOs, CFOs and other C-level executives. Respondents represented 4 sectors, including financial services, consumer products and retail, technology, life sciences, automotive and transportation, oil and gas, power and utilities, mining and metals, industrials, and real estate, hospitality and construction. Surveyed companies annual global revenues were as follows: less than US$500m (5%); US$500m US$999.9m (5%); US$b US$.9b (0%); US$b US$4.9b (8%); and greater than US$5b (%). Global company ownership was as follows: publicly listed (58%), privately owned (5%), family owned (4%) and government/ state owned (%). 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. 08 EY Australia. All Rights Reserved. APAC no. AUNZ ED None PH840 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. The views expressed in this article are the views of the author, not Ernst & Young. Liability limited by a scheme approved under Professional Standards Legislation. ey.com