How can M&A deal with today s demands while activating your digital tomorrow?

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1 Capital Confidence Barometer November 2017 ey.com/ccb 17th edition Australasia How can M&A deal with today s demands while activating your digital tomorrow? Actively managing the present and anticipating the future defines new M&A strategies.

2 Record confidence in M&A as corporates pursue digital transformation Our 17th Global Capital Confidence Barometer finds Australian and New Zealand executives significantly more bullish on M&A than their global counterparts. In Oceania, despite an uptick in local concerns around geopolitical risk and domestic political uncertainty, 6% of respondents expect to pursue M&A in the next 12 months considerably above trend. Local M&A plans have not been this robust since the Barometer s launch in 2010, with one exception in mid This record intention to pursue M&A is supported by extremely strong confidence in the performance of the global economy, record-high stock market valuations and the strength of the global and local M&A markets. With organisations accepting volatility as the new normal, acquisitive ambitions are being driven by the desire to future proof organisations against technology-driven disruption. Alongside efforts to bolster their internal digital resources, local organisations are also looking to M&A to acquire innovation and talent. We are seeing an increase in shareholder activism, with boards under pressure to achieve growth, leading to active portfolio management. Competition from private equity (PE) is also on the rise. With record levels of dry powder, broadening funds base (credit, special situations and infrastructure) and an increased appetite for exposure to Australasia, PE is set to take a bigger role in the competition for assets. Do you expect your company to actively pursue mergers and acquisitions in the next 12 months? 66% 56% 59% 57% 56% 6% 5% 50% 55% 56% 29% 24% 5% 4% 2% 0% 40% 44% 41% 41% 45% Apr 1 Oct 1 Apr 14 Oct 14 Apr 15 Oct 15 Apr 16 Oct 16 Apr 17 Oct 17 Average Global AU and NZ respondents 2 Australasia Capital Confidence Barometer

3 Key findings from local respondents EY s Capital Confidence Barometer is a regular survey of 2,650 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 17th Barometer, carried out in September and October 2017, provides a snapshot of our local findings from 177 executives in Australia and New Zealand in the context of global results. Macroeconomic environment 97% 48% 5th see the global economy as improving or stable think the greatest economic risk to core business growth is geopolitical risk Australia becomes a top 5 global investment destination M&A outlook 6% 97% 90% intend to pursue acquisitions in the next 12 months see the local M&A environment as stable or improving expect their pipeline to increase or stay the same Growth and portfolio strategy 41% 80% 52% of companies expect increasing competition for assets from private equity expect the number of companies impacted by shareholder activism to increase or stay the same recognise the need to ensure they have a broader narrative to engage all stakeholders Digital transformation 59% 7% 28% are responding proactively to the impact of digital technology are developing digital capabilities in house are buying, forming alliances or creating JVs with digital companies Australasia Capital Confidence Barometer

4 Macroeconomic environment Confidence in the macroeconomic environment is continuing to improve, with the strength of the global upswing now broadly based across regions and flowing through to stronger world trade growth. Continuing the year-long trend of an increasingly optimistic outlook for the global economy, 97% of all Australia and New Zealand executives surveyed are confident that the state of the global economy is stable or improving in line with 96% six months ago. What has changed is the percentage of executives predicting growth. Almost three-quarters (72%) are optimistic that the global economy is improving in line with global peers. The stronger-than-expected turnaround in economic activity in the Eurozone and above trend growth in Japan have boosted expectations for global economic growth. With China and the US economies also recording solid growth, all the major engines of global activity are showing momentum for the first time since the end of the Global Financial Crisis. In Australia and New Zealand, respondents are more concerned about political and economic uncertainty than they are about increased regulation. Almost half (48%) of local executives surveyed believe the greatest economic risk to core business growth is geopolitical risk, including changes in trade policy and protectionism. This is five percentage points higher than the global view, possibly reflecting uncertainty over the outcome of the New Zealand election at the time of this survey. Australia and New Zealand executives are also increasingly confident in all forms of capital markets at both the local and global level. Locally, confidence in corporate earnings has risen markedly, share market indices have increased with valuations above long-term averages and respondents also have improving expectations of credit availability. This is consistent with solid levels of business sentiment more generally and an emerging recovery in business investment, supported by a continuing a low interest rate environment. That said, respondents are more cautious around short-term market stability, with 12% now forecasting declining stability, versus 5% six months ago. However, one area of ongoing concern is continuing low wages growth, which is weighing on household incomes and consumption. Until stronger household spending materialises, there are grounds for caution on the local economic outlook. Policy makers recognise this and are likely to be cautious in withdrawing monetary accommodation. If this is the case, we will enter a period where improving economic conditions, low inflation and low costs of capital will coexist leading to increased C-suite confidence in investing in both existing operations and acquisitions. What is your perspective on the state of the Global economy 4 Local economy 6 5 Oct Apr Oct 16 4 Australasia Capital Confidence Barometer

5 Macroeconomic environment Please indicate level of confidence at the local level? Corporate earnings Credit availability Short-term market stability Equity valuations/ Stock market outlook Oct 17 Apr 17 Oct 16 Please indicate level of confidence at a global level? Corporate earnings Credit availability Short-term market stability Equity valuations/ Stock market outlook Oct 17 Apr 17 Oct 16 Australasia Capital Confidence Barometer 5

6 Growth and portfolio strategy Local companies are seeking growth by focusing on their core business and simplifying portfolios by divesting non-core assets. Locally, portfolio analysis, including strategic divestments, tops the list of strategic priorities. Almost a quarter (2%) of local executives say this will be the most prominent issue guiding boardroom thinking over the next six months, compared with just 16% of global respondents. Not surprisingly, significantly more local executives (8%) say they are reviewing portfolios continuously compared with their global peers (22%). This demonstrates an increasingly disciplined approach to portfolio management and capital allocation in a low-growth environment. We continue to see strong demand from institutions and retail investors for quality, growth stocks. IPO activity over the past 12 months has been lower in dollar terms, with investor anxiety that business risks have out-weighed vendor pricing expectations. We see the opportunity for corporates to divest non-core, quality businesses via IPO to generate more growth capital. Globally and locally, beyond growing market share, the main strategic driver for pursuing acquisitions is to gain the talent and innovation needed to support long-term success in the face of digital disruption and sector convergence. Globally, boards are more focused on identifying opportunities for growth. Local companies, in particular, are looking to bring on board expertise that can help them navigate these new environments. Executives expect shareholder activist campaigns to increase in the next 12 months, as a low-yield environment compels such investors to look for other avenues to boost returns. Shareholder activism has grown to be a key boardroom focus over the past two years. Local boards are taking an increasingly disciplined approach to portfolio management and capital allocation in a low-growth environment. 6 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? (Select up to three) Portfolio analysis, including strategic divestment (spin-off/ipo) Impact of digital technology and transformation to our business model/threat of digitally enabled competitors Identifying opportunities for growth, 17 including M&A, JVs and alliances Impact of increased economic 16 and political uncertainty 16 Shareholder activism, including returning 14 cash to shareholders 17 Sector blurring/increased competition 7 from companies in other sectors 9 Increasing regulatory or 5 governmental intervention 5 AUS and NZ Global How frequently are you reviewing your portfolio? Continuously 22 8 Annually Every quarter 6 20 Less than annually 2 Every 6 months AUS and NZ Global Australasia Capital Confidence Barometer 7

8 Growth and portfolio strategy Convergence More than half of local respondents say they are proactively addressing the challenges of sector blurring, with its accompanying increased competition from companies in other sectors. Technology is the leading driver of convergence across sectors especially in telecommunications and media and entertainment, with more than 50% of respondents indicating they are seeing convergence with the technology sector. More than 0% of respondents in automotive and transport, financial services and life sciences are seeing convergence with the technology sector. Corporates are getting on the front foot to address cross-sector convergence. Dealing with digital disruption The impact of digital technology and transformation remains prominent on boardroom agendas across the world, with Australasian companies still trailing their global peers in their appetite for taking a proactive approach to disruptive forces in their industry. That said, responding to digital technology and sector convergence was not on the agenda at all a few years ago. Today, 59% of our respondents say they are on the front foot with this issue, compared with 65% of global executives. Only 41% say they are being proactive in responding to changing customer behaviours, despite a third identifying this as the key disruptive force impacting their sector. This suggests that the disruption resulting from changing customer behaviours is of a digital nature, as Australasian companies are responding by being proactive to the impact of digital technology and transformation to business models. In terms of how they are responding to disruption, for global and local respondents developing in-house capabilities is more important than buying digital companies, or forming alliances and JVs with companies with digital capabilities. Our local respondents plan to improve digital capabilities through both in-house development and hiring executive with digital expertise. An increasing number (15%) also plan to increase their use of contingent workers. Only 1% believe automation will reduce workforce numbers. With regard to digital transformation and responding to digital innovation, do you plan to improve your digital capabilities by: Developing digital capabilities in-house 7 8 Hiring executives with digital expertise from inside or outside our industry 5 2 Forming JVs with/buying digital companies that support our digital and corporate strategy 28 0 AUS and NZ Global 8 Australasia Capital Confidence Barometer

9 Growth and portfolio strategy At a time of increasing automation, which of the following does your organization expect to do in the next 12 months? Reskill/train our people our to better respond to technology changes Increase use of 15 contingent workers 11 Create new jobs/ hire people 2 24 Reduce workforce numbers 1 11 Shift skills and talent within our business* Outsourcing of functions 4 4 AUS and NZ Global *Relocate people to other geographies/shift skills and talent within our business/re-shore activity to use technology rather than offshored labor With regard to these disruptive forces, do you prefer to be proactive or reactive? Impact of digital technology and transformation to our business model Sector blurring/increased competition from companies in other sectors Proactive Proactive Reactive 41 5 Reactive 45 4 The threat to our business from digitally enabled competitors and start-ups Changing customer behaviours Proactive Proactive Reactive 5 46 Reactive AUS and NZ Global Australasia Capital Confidence Barometer 9

10 M&A outlook Confidence in the global M&A market is going from strength to strength, as macroeconomic conditions stabilise post the Brexit and US presidential election shocks. High local M&A expectations are underpinned by increased confidence in macroeconomic measures, particularly interest rates, stock market indices and corporate earnings. Local companies are increasingly looking to take advantage of the M&A opportunities in buoyant local and global economies. Confidence in the global M&A market is at a record high, with 99% of respondents at both a global and local level now believing it will improve or remain stable. Confidence in the already strong local M&A market continues to be robust. Around half of our respondents expect further improvement and only % expect the local M&A market to decline over the next 12 months. This level of confidence is on the back of strong growth in deal volumes in the APAC region. Volumes increased by 6.5% in the last 12 months, making APAC the world s fastest growing region in terms of deal volume. Dealmaking intentions soar Local dealmaking intentions are at a near record level, with almost two-thirds of respondents expecting to actively pursue M&A opportunities in the next 12 months. This is significantly above the long-term trend, suggesting calendar 2018 may be a record year post-gfc. When structuring these deals, more than half of the local responses (52%) say their new key factor is to ensure a broader narrative that will engage all stakeholders. This is an interesting new nuance, reflecting societal changes and a greater focus on purpose and purpose-led transformations. As dealmaking intentions have increased, so too have expected pipelines. Local expectations around pipeline growth are at the highest level for the last three surveys, increasing in each survey from 27% in April 2016 to 49% in October Almost half of Australian and New Zealand executives expect their M&A pipeline to increase, versus less than a third 12 months ago, continuing the upward trend in deal volume growth seen across the region in the last 12 months. Expect a continued rise in PE as a competitor for assets Local executives also expect even stronger PE deal activity over the next 12 months. At the start of October 2017, dry powder levels in APAC PE had reached the record level of US$57.5bn and in Australia some $7,7bn. With large international PE firms planning to add more APAC investments to their portfolios, we expect PE to be the biggest story in M&A next year. We expect continued strong levels of activity in the mid-market from domestic PE firms and more public to private transactions from large domestic and global PE firms. As a result, local corporates are likely to be further challenged on pricing for assets and cross-border dealmaking will also be prominent as companies look to tap into new areas of growth. Corporates will be looking for robust synergy cases, with board endorsement, to justify deal pricing. What is your expectation for the local M&A market in the next 12 months? Oct 17 Apr 17 Oct Australasia Capital Confidence Barometer

11 M&A outlook What is your expectation for the global M&A market in the next 12 months? Global Aus and NZ respondents Oct 17 Apr 17 Oct 16 How do you expect your M&A pipeline to change? Global Aus and NZ respondents Increase Increase No change No change Decrease 10 Decrease Oct 17 Apr 17 Oct 16 Australasia Capital Confidence Barometer 11

12 M&A outlook Top 6 sectors actively pursuing acquisitions in the next 12 months Technological disruption appears to be a key driver, with each sector below reporting at least a medium level of sector convergence with the Tech sector. This may be reflected in the high cross sector dealmaking intentions. Oil and gas, mining and metals and power and utilities are all in the top six sectors, driven by a positive outlook on a range of commodity prices, supported by renewed PE interest in these sectors % Telecommunications 4 70% Oil and gas 2 88% Automotive and transportation 5 69% 79% Technology 6 67% Power and utilities Mining and metals Top 5 investment destinations With global economic growth accelerating, trade flows will become more fluid. Companies are looking across a broad range of geographies, with primary preferred destinations outside their own region. Looking at the intentions of global companies, Australia has surged from eighth to fifth position its first time in the top 5 since 201. In the current world order, Australia is being seen as a safe haven of political stability and strong regulation relative to other countries and an important beach head for Asian growth plans by many US, European and Middle Eastern corporates. It seems that short- to medium-term economic conditions are ripe for investment, but geopolitical change and increasing unpredictability introduces greater risk. In these conditions, businesses are taking a prudent approach to investment. Local companies Global companies 1 Australia US 2 New Zealand China China UK 4 US Germany 5 UK Australia (up from 8th six months ago) 12 Australasia Capital Confidence Barometer

13 Key takeways Can private equity become the partner of choice in dealmaking? PE s momentum is growing significantly, and we expect it to continue into Corporates have the opportunity to leverage PE to ensure that they secure assets, create/enhance the agility of the business and reduce competition in the process. Who will be your main competitor in the future? Technology, digital and customer demands are accelerating sector convergence and inventing new markets at an increasing pace. But technology is just a gateway. Do you understand who s in your market now and who will be there tomorrow? It s time to look for potential new partners and targets early enough to ride the new waves of value creation. Are you able to take near-term advantage without losing strategic discipline? The near-term pickup in the global economy is supporting growth and helping to placate demanding shareholders. But fundamental shifts across all sectors mean companies should be looking for sustainable long-term value creation too via acquisitions, alliances and investments. Is your portfolio fit for purpose? In a rapidly evolving environment of disruptive change, more companies are continuously reassessing their portfolios. Can you refocus your core assets to proactively respond to emerging opportunities? Real-time monitoring of performance across all assets will highlight where to invest and what to sell. Are activists the best warning sign for strategic reinvention? Activists investing in a company can be an early sign of value opportunity. Companies should engage fully and early with onboard investors to understand the concerns and be willing to pivot if required. Are you open minded to multiple futures, without being constrained by outdated thinking? New industrial landscapes and business models are evolving and morphing. Companies should look to using corporate venture capital to invest in portfolio startups and disruptive challengers to open up future growth. Is your growth inclusive? Companies need a well-articulated inclusive growth strategy and narrative to demonstrate that value is being created for all stakeholder groups. Otherwise, you risk a backlash from customers, communities and policy makers. Do you have a global mind-set? Fears over potential trade barriers, driven by economic nationalism, may appear to undermine globalisation. But with supply chains and customers increasingly global, companies should be even more open to cross-border operations. Australasia Capital Confidence Barometer 1

14 Contacts For a conversation about your capital strategy, please contact us: David Larocca EY Oceania Leader Transaction Advisory Services david.larocca@au.ey.com Darrin Grimsey Government and Public Sector Ishwar Madhyastha Technology, Media & Entertainment and Telecommunications Richard Bowman Real Estate Nick Cardno Energy Paul Murphy Mining & Metals Julie Wolstenholme Australian Diversified Business Jeremy Barker Consumer and Industrial Products Bryan Zekulich Private Equity Tim Coyne Financial Services Stuart Bright Valuations & Business Modelling Gary Nicholson Transaction Support John Matthews Infrastructure Advisory Daryn Saretzki Operational Transactions Services Adam Nikitins Corporate Restructuring Peter Magill Mergers and Acquisitions Marcus Willison Real Estate Advisory Services Reid Zulpo Transaction Tax Grant Hodges NZ Infrastructure & Transactions Leader Global contacts Steve Krouskos EY Global Vice Chair Transaction Advisory Services EY Global Limited steve.krouskos@uk.ey.com Follow me on Julie Hood EY Deputy Global Vice Chair Transaction Advisory Services EY Global Limited julie.hood@uk.ey.com Follow me on 14 Global Capital Confidence Barometer

15 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 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 September and October, we surveyed a panel of almost,000 executives in 4 countries; 6% 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, industrials, and real estate, hospitality and construction. Surveyed companies annual global revenues were as follows: less than US$500m (27%); US$500m US$999.9m (22%); US$1b US$2.9b (20%); US$b US$4.9b (9%); and greater than US$5b (22%). Global company ownership was as follows: publicly listed (58%), privately owned (5%), family owned (4%) and government/state owned (%). Global Capital Confidence Barometer 15

16 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 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 EYGM Limited. All Rights Reserved. APAC No. AUNZ PH ED None 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/ccb