October th edition. Global Capital Confidence Barometer Chile

Transcription

1 October th edition Capital Confidence Barometer Chile

2 About the Barometer EY s Capital Confidence Barometer is a regular survey of senior executives from large companies around the world, conducted by the Economist Intelligence Unit (EIU). The respondent community comprises an independent EIU panel of senior executives and select EY clients and contacts. Our 15th Barometer provides a snapshot of our findings, gauges corporate confidence in the economic outlook, and identifies boardroom trends and practices in the way companies manage their Capital Agenda. EIU panel of more than 1,700 executives surveyed in August and September executives from Chile Companies from 45 countries Respondents from 18 industry sectors 911 CEOs, CFOs and other C-level executives Page 2

3 Macroeconomic environment

4 Executives view the global economy as stable but recognize an increase in downside risks What is your perspective on the state of the economy today at the global level? 22% 15% Improving 37% Improving 41% 83% 42% 54% 54% Stable 4 Stable (GDP change = same growth as 2015) 9% (GDP change = same growth as 2015) 33% 3 24% 31% Declining 15% Declining 26% Oct 16 2 Apr 16 Oct 15 Economic forecasts for the global economy support an outlook for 2016 growth as being similar to Companies are being challenged not only by continuing uncertainty over where faster economic growth will come, but also unsettling events such as the UK s decision to leave the European Unit (EU) and heightened market volatility over US interest rates. Page 4

5 Chile s executives view the domestic economy as stable What is your perspective on the state of the local economy today? 4% Improving 9% 11% 73% Stable (GDP change = same growth as 2015) 42% 52% Declining 39% Oct 16 Apr 16 47% Oct 15 The majority of Chilean executives view the local economy as stable, supporting overall improving business sentiment. Page 5

6 responses signal an end to corporate earnings recession, credit markets may tighten Please indicate your level of confidence in the following at the global level. 1 6% % % 41% 5% 11% 13% 22% 41% 46% 73% 4 41% 13% 14% 34% 4 55% 54% 39% 31% 1 9% 41% 4 71% 47% 51% oct 15 abr 16 oct 16 Corporate earnings oct 15 abr 16 oct 16 oct 15 abr 16 oct 16 Credit availability Equity valuation oct 15 abr 16 oct 16 Short-term market stability 17% 14% 15% 49% 4 66% 3 34% 17% 33% 43% 46% 5 45% 46% 31% 25% 22% % 35% 31% 2 21% 2 35% 46% 44% 44% 42% Negative Stable Positive oct 15 abr 16 oct 16 Corporate earnings oct 15 abr 16 oct 16 Credit availability oct 15 abr 16 oct 16 Equity valuation oct 15 abr 16 oct 16 Short-term market stability Executives slightly more positive outlook on earnings suggests the corporate earnings recession may be near an end. The downward trend on credit availability over the past 12 months may be influenced. by concerns over the continuation of quantitative easing, especially by the European Central Bank (ECB), and timing and pace of US rate rises. Page 6

7 Chilean executives see domestic market indicators as stable Please indicate your level of confidence in the following at the local level. Corporate earnings Short-term market stability Positive Stable Negative 27% 2 33% 37% 45% 35% 22% 54% Positive Stable Negative 31% 1 17% 46% 45% 41% 37% 42% Equity valuation / stock market outlook Credit availability Positive Stable Negative 39% 46% 3 27% 42% 31% 65% Positive Stable Negative 35% 16% 36% 2 15% 21% 36% 5 63% Oct 16 Apr 16 Oct 15 Short-term market stability and credit availability have become more positive over the last six months. Page 7

8 Increasing market and political instability challenge corporate and M&A strategies What do you believe to be the greatest economic risk to 1) your core business and 2) your M&A strategy over the next 6 12 months? Select your top two risks in order of importance. Core business High volatility in currencies, commodities and other capital markets Political stability in your home country/region (incl. the rise in populist/nativist politicians and parties) 32% 16% 29% An unexpected rapid slowing of growth in China Political stability in your home country/region (incl. the rise in populist/nativist politicians and parties) 35% 31% geopolitical instability (incl. terrorism, border and territorial disputes) 16% 16% High volatility in currencies, commodities and other capital markets 15% 31% Slowdown in global trade flows (incl. economic nationalism, protectionism, industrial policy) 11% 36% geopolitical instability (incl. terrorism, border and territorial disputes) An unexpected rapid slowing of growth in China 7% 5% Economic and political stability in the European Union (incl. Brexit) Economic and political stability in the European Union (incl. Brexit) 5% 4% Slowdown in global trade flows (incl. economic nationalism, protectionism, industrial policy) Most important Second most important Heightened global and regional political instability, especially in China, are the continued concerns to Chilean l businesses, while local political instability remains an issue as well. The slowdown in global trade flows is an emerging concern, which has been exacerbated by rising economic and political nationalism. Page 8

9 Increasing market and political instability challenge corporate and M&A strategies What do you believe to be the greatest economic risk to 1) your core business and 2) your M&A strategy over the next 6 12 months? Select your top two risks in order of importance. M&A strategy High volatility in currencies, commodities and other capital markets 32% 14% Political stability in your home country/region (incl. the rise in populist/nativist politicians and parties) 34% geopolitical instability (incl. terrorism, border and territorial disputes) Economic and political stability in the European Union (incl. Brexit) 4% Political stability in your home country/region (incl. the rise in populist/nativist politicians and parties) Slowdown in global trade flows (incl. economic nationalism, protectionism, industrial policy) 22% 26% 11% 4 High volatility in currencies, commodities and other capital markets geopolitical instability (incl. terrorism, border and territorial disputes) 15% 26% An unexpected rapid slowing of growth in China 7% 4% An unexpected rapid slowing of growth in China Economic and political stability in the European Union (incl. Brexit) 5% 4% Slowdown in global trade flows (incl. economic nationalism, protectionism, industrial policy) 27% Most important Second most important An increase in political instability at home and in Europe and a slowdown in global trade flows are the primary concerns of Chilean executives. Page 9

10 Corporate strategy

11 Innovation and technology is most disruptive, but regulatory pressure is a growing challenge From where do you see the most disruption to your core business in the next 12 months? Select your top two disruptors in order of importance. Sector convergence/increase competition from companies in other sectors Product innovation 27% Product innovation 2 Industry regulation Industry regulation 1 15% Sector convergence/increase competition from companies in other sectors Increasing globalization 15% Changing customer behavior and expectations Changing customer behavior and expectations 15% Increasing globalization Advances in technology and digitalization 9% 34% Advances in technology and digitalization 4% Primary disruptor Secondary disruptor Across many industries, accelerating innovation enabled by advances in technology and digitalization is disrupting many business models. Another top challenge is increasing industry regulation accompanying globalization, which is adding an extra layer of complexity for companies. Page 11

12 Companies are balancing both organic and inorganic routes to higher earnings From where do you see growth within your company coming over the next 12 months? 9% 16% 13% 11% 55% 53% 2 Organic Mergers and acquisitions Joint ventures Alliances The low-growth economic environment is compelling companies to look at both organic and inorganic strategies to sustain and grow their business. Companies are turning to a mix of buying and partnering to achieve higher returns and take advantage of changing industry landscapes. 27% of Chilean dealmakers are looking to JVs and alliances for growth. Page 12

13 Companies are adapting talent strategies to take advantage of technology How do you think that advances in technology will change your employment or talent strategy (disrupting human labor with robots, algorithms, gig economy, flexible working, big data and analytics, etc.)? Select all that apply. Shift skills and talent within our business to gain efficiencies from greater automation 71% Shift skills and talent within our business to gain efficiencies from greater automation 77% Create jobs/hire talent 52% Create jobs/hire talent 65% Reduce workforce numbers Reduce workforce numbers 42% Changes in the skills required in a more technology-driven environment are compelling companies to reskill their employees. Contrary to popular perception, increasing automation and technology are more likely to create more jobs than reduce workforce numbers. Page 13

14 Automation is increasing productivity for those companies that make the right investments As companies have become more automated, this does not appear to have translated into increased productivity at the macro economic level. Considering automated processes, how do you see automation impacting productivity within your company? 6% 25% 37% 15% 5 We see an increase in productivity due to more automated processes. 32% Prior investments in automation have not proven to be successful. We are still duplicating automated and nonautomated processes. We are not sure. The split between success and failure of investment in automation is near balance. However, it may be that the winners have learned the lessons of other companies failures. There are still a number of companies that are duplicating automated and non-automated processes until they see the benefit of automation. Page 14

15 Political and economic instability has reached board attention in Chile Considering the answers given in this survey, which of the following will be most prominent on your boardroom thinking during the next six months? Select your top two issues in order of importance Impact of digital technology on your business model, e.g., new sales channels/markets, IoT, Cybersecurity Shareholder activism, including returning cash to shareholders Identifying opportunities for growth, including M&A, JVs and alliances Impact of increased economic and political instability Portfolio analysis, including strategic divestment (spin-off/ipo) Sector convergence/increased competition from companies in other sectors 34% % 9% 9% 11% 1 Impact of increased economic and political instability Identifying opportunities for growth, including M&A, JVs and alliances Sector convergence/increased competition from companies in other sectors Impact of digital technology on your business model, e.g., new sales channels/markets, IoT, Cybersecurity Portfolio analysis, including strategic divestment (spin-off/ipo) Shareholder activism, including returning cash to shareholders 42% 34% 15% 34% 27% 15% Most important Second most important The impact of digital technology and sector convergence is compelling companies to identify opportunities for growth. Page 15

16 Mergers and acquisitions outlook

17 Increasing confidence in stability of the global M&A market is likely to drive dealmaking What is your expectation for the M&A market in the next 12 months at the global level? Improve 29% 46% 49% 6 83% Improve 3 39% 33% 36% 51% Stay the same Decline 15% 9% 5% 2% 2% 1% 39% 49% 49% 62% Stay the same Decline 7% 14% 13% 3% 5 42% 47% 54% 61% Oct 16 Apr 16 Oct 15 Apr 15 Oct 14 While we do not see a return to the record highs of 2015, executives are confident that a relatively healthy M&A market will continue in the next 12 months. The slightly more negative outlook on M&A in the next 12 months may be influenced by the large number of deals that have been canceled or failed to complete during Page 17

18 Chilean executives see domestic M&A market as improving What is your expectation for the M&A market over the next 12 months? At the local level. 3 Improve 25% 5 Stay the same 63% 61% 4% Decline 14% Oct 16 14% Apr 16 Oct 15 3 of Chilean executives now see the local M&A market as improving. Page 18

19 Executives remain positive about dealmaking, look to boost deals in 2017 Do you expect your company to actively pursue mergers and acquisitions in the next 12 months? 57% 41% % 31% 41% 35% 25% 29% 43% 35% 16% 3 44% 4 56% 59% 43% 44% 51% 5 57% 35% 54% Chile Average Chile abr 10 oct 10 abr 11 oct 11 abr 12 oct 12 abr 13 oct 13 abr 14 oct 14 abr 15 oct 15 abr 16 oct 16 An EY analysis of CCB M&A appetite, correlated to the realized deal market, is forecasting an upturn in the first half of Despite economic uncertainty, the appetite for dealmaking remains above the long-term CCB average. Page 19

20 Deal fundamentals supportive of an positive M&A environment What is your level of confidence in the following at the global level: Number of acquisition opportunities Quality of acquisition opportunities Likelihood of closing acquisitions 59% 43% 36% Positive 5 Positive 47% Positive 42% 76% 69% 57% 34% 46% 53% Stable 3 Stable 43% Stable 47% 1 26% 36% 7% 11% 11% Negative 4% 6% Negative 1 5% Negative 11% 7% Oct 16 Apr 16 Oct 15 Companies are extremely bullish across the whole range of deal indicators, especially around the number of acquisition opportunities. Page 20

21 Local deal fundamentals supportive of an positive M&A environment What is your level of confidence in the following at the local level: Number of acquisition opportunities Quality of acquisition opportunities Likelihood of closing acquisitions Positive 42% 39% 49% Positive 42% 35% 27% Positive 31% 2 5 Stable 46% 35% 31% Stable 5 44% 53% Stable 33% 46% 54% 15% Negative 26% 2 Negative 21% 2 Negative 17% 26% Oct 16 Apr 16 Oct 15 Increasing confidence from stable to improving on number, quality and likelihood of closing deals. Page 21

22 companies have more deals in the pipeline How many deals do you currently have in your pipeline, regardless of deal size? Considering the next 12 months, how do you expect your pipeline to change? 49% 5 2 Increase 9% 4 14% 13% 9% 3 21% No change 3 14% % 9% Decrease 11% 1 15% 2% 26% 25% 35% 65% 64% 63% Oct 16 Apr 16 Oct 15 49% of global companies say they have more than five deals in their pipeline. Page 22

23 Chilean executives have more deals in pipeline How many deals do you currently have in your pipeline, regardless of deal size? Considering the next 12 months, how do you expect your pipeline to change? 5 14% 25% Increase % 25% 36% 31% 29% 32% 5 No change Decrease 7% 6% 15% 25% 43% 62% 69% Oct 16 Apr 16 Oct 15 71% of Chilean executives say they have two or more deals in their pipelines. Page 23

24 but mainly of a smaller size What is your largest planned deal size in the next 12 months? Greater than US$5b 1% 1% 1% Greater than US$5b US$1.1b US$5b 4% 11% 2% US$1.1b US$5b 7% 13% US$251m US$1b 26% 39% 53% US$251m US$1b 42% 57% US$0 US$250m 42% 49% 71% US$0 US$250m 36% 5 6 Oct 16 Apr 16 Oct 15 The drop-off of mega-deals seen through 2016, largely due to concerns over regulatory oversight, looks set to continue. Page 24

25 which should accelerate deal completions in the next 12 months How many acquisitions do you expect to complete in the next 12 months? 5 11% 3% 7% 5 5% 4 13% 5% 5% 4 5% 6% % 3 14% 5% % 25% 4 57% 52% % 11% 31% 44% 72% 74% Oct 16 Apr 16 Oct 15 In a fast-changing, complex environment, companies plan to make more acquisitions of innovative, emerging assets. Page 25

26 which should accelerate deal completions in the next 12 months. Considering the past 12 months, is this more or less than the number of acquisitions you completed? More 11% 2 27% More 43% The same 69% 71% 69% The same 36% 45% 62% Less 4% 11% 1 21% Less 32% Oct 16 Apr 16 Oct 15 In a fast-changing, complex environment, companies plan to make more acquisitions of innovative, emerging assets. Page 26

27 Companies are being compelled by external influences to acquire outside their own sector What is the main strategic driver for pursuing an acquisition outside your own sector? Select your top two drivers in order of importance. Reacting to competition 11% Changes in customer behavior 5 Access to differentiated customers, details, or databases 14% Access to differentiated customers, details, or databases 5 New product or service innovation 1 Reacting to competition Changes in customer behavior 1 9% New product or service innovation Acquiring talent 13% 39% Access to new materials or technologies/digitalization Access to new materials or technologies/digitalization 9% Acquiring talent 10 Most important Second most important Companies are primarily reacting to events and factors outside their own control when moving outside their core sector, which may explain the desire to acquire talent to help them navigate this unfamiliar environment. Page 27

28 Companies are looking for future growth potential when acquiring in their own sector What is the main strategic driver for pursuing acquisitions in your current sector? Select your top two drivers in order of importance. Growth market share 14% Growth market share 36% 3 Acquiring technology or new production capabilities 2 15% Acquiring innovative start-ups 29% Acquiring innovative start-ups 17% Move into new geographies 14% 31% Move into new geographies 16% 1 React to customer behavior 14% 31% Acquiring talent 15% 13% Acquiring technology or new production capabilities 7% React to customer behavior 9% 36% Acquiring talent Most important Second most important Companies are also reacting to customer behaviors, which are in themselves driven by innovation. Page 28

29 Due to concerns raised by Brexit, the UK is no longer a top investment destination globally Which are the top destinations in which your company is most likely to pursue an acquisition in the next 12 months (including your domestic market)? 5. US Top destinations 2. Mexico Chile 1. US 1. Chile 2. China 2. Mexico 3. Germany 3. Brazil 4. Canada 4. Peru 5. France 5. US 4. Peru 1. Chile 3. Brazil Top destination countries Top destinations are based on a weighted scoring of respondents top three investment destinations in order of importance. As in previous Barometers, Chilean respondents tend to look towards the Americas for targets. Page 29

30 Executives are taking a balanced view on investment destinations Which are the top destinations in which your company is most likely to pursue an acquisition in the next 12 months (including your domestic market)? Outbound 36% Intra regional 69% Intra regional 32% Outbound 17% Domestic 32% Domestic 14% With economic growth trends, hard-to-identify executives are keeping an open mind as to which countries to invest in. Chile executives are more focused on deals within their region. Page 30

31 Top five sectors With highest intention to pursue acquisitions Percentage reflects those who intend to actively pursue acquisitions in the next 12 months. Consumer products and retail Diversified industrial products average Life sciences 71% 6 57% 56% Chile s top sectors with intentions to pursue acquisitions Construction Automotive and transportation Technology Consumer products Technology 54% Automotive and transportation 54% [All sectors with at least 70 respondents. ] Strong deal sentiment across many sectors is driven by volatility and disruption. Page 31

32 Quantitative easing continues to put upward pressure on valuations How do sellers expectations of transaction valuations currently compare to those of buyers? Considering the next 12 months, how do you expect the following to change? Sellers expectations of transaction valuations compared to those of buyers The price/valuation of assets Significantly higher (25% or more) Somewhat higher (1 25%) The gap is small (<1) No gap 9% 6% 15% 56% 42% 49% 33% 42% 35% 2% 1 1% Increase Remain at current levels Decrease 4% 47% 52% 35% 45% 4 61% Increase Remain at current levels Decrease 21% 1 39% 55% 54% 56% 24% 2 5% Oct 16 Apr 16 Oct 15 As central banks shift their asset-buying programs to include corporate bonds and possibly equities, executives now see a higher valuation gap. This may result in slightly higher valuations in the near term. Page 32

33 Valuations stable for Chilean dealmakers How do sellers expectations of transaction valuations currently compare to those of buyers? Considering the next 12 months, how do you expect the following to change? Sellers expectations of transaction valuations compared to those of buyers The price/valuation of assets Significantly higher (25% or more) Somewhat higher (1 25%) The gap is small (<1) No gap 5% 11% 2 25% 5 37% 53% 3 11% Increase Remain at current levels Decrease 35% 33% 11% 57% 44% 7 Increase Remain at current levels Decrease 11% 26% 26% % Oct 16 Apr 16 Oct 15 The majority of Chilean dealmakers view the valuation gap as small to no gap. Page 33

34 Executives are acting with discretion and are prepared to walk away rather than overpay If you have either failed to complete or canceled a planned acquisition in the past 12 months, what was the primary reason? Select your top two reasons in order of importance. 54% We have not canceled /failed to Chile 46% complete a planned acquisition respondents We have canceled/failed to complete a planned acquisition Gap between buyer and seller expectations too wide 2 17% Concerns about regulatory or antitrust reviews 31% Investor or board scrutiny Gap between buyer and seller expectations too wide 3 14% Issues uncovered during due diligence 22% Investor or board scrutiny 14% Competition from other buyers 16% 1 Competition from other buyers 14% Concerns about regulatory or antitrust reviews 13% 1 Economic and political instability 37% Economic and political instability 5% 29% Issues uncovered during due diligence 21% Most important Second most important The main reasons for deal cancelations are regulatory and disagreement over valuation, which may be due to greater investor or board scrutiny. Economic and political instability has also caused deals to be pulled during the past 12 months. Page 34

35 Senior management time critical for successful integration For acquisitions completed recently, what was the most significant issue that contributed to deals not meeting expectations? Select all that apply. We have not completed an acquisition recently that did not meet our expectations 14% 5 Underestimated the senior management time required 35% 36% Poor identification and quantification of synergies 39% Underestimated the challenges of IT integration 34% Underestimated the cultural challenges 15% 35% Underestimated investment to grow products and revenue 36% Loss of sales and customers due to lack of planning Uncertain 2% 3 Chile The level of preparation and readiness of key functions and stakeholders is key to a successful integration. Executives must be realistic about potential negative synergies, including customers who may be unable to continue their relationships with the new entity, additional regulatory costs or underfunded pension obligations. Executives also express dissatisfaction about a range of other post-deal issues, including an under appreciation of the amount of senior management time and resources required for a successful deal process. Page 35

36 The majority of executives are using big data and analytics to identify growth and value How do you use analytics and big data for executing your M&A process and strategy? Select all that apply. To better identify synergies and determine appropriate valuation of the targeted asset To identify growth options and potential targets 5 55% 54% 54% To enhance the post-closing monitoring and optimization of the investment assumptions To enhance the due diligence process 35% 3 37% 47% To review our current portfolio of assets 27% 27% We are not using at all 5% 15% We are not using, but we are considering it 4% 15% Chile New technologies that enhance the deal process are primarily being used to identify the best targets to support a company s strategy. Overwhelmingly, executives have grasped the advantages that big data and analytics bring throughout the deal process. Page 36

37 Survey demographics

38 Survey demographics What are your company s annual global revenues? What is your position in the organization? US$5b or more US$3b to US$5b 17% 24% C-level executive 51% US$1b to US$3b 17% SVP/VP/director 2 US$500m to US$1b US$250m to US$500m 1 24% Head of Business Unit(BU)/dept. 21% What best describes your company ownership? Family-owned; 2% Publicly listed; 66% Privately owned; 3 Government/stateowned enterprise; 2% Page 38

39 Survey demographics What are your company s annual global revenues? What is your position in the organization? US$5b or more US$3b to US$5b 27% C-level executive 35% US$1b to US$3b US$500m to US$1b 31% SVP/VP/director 42% US$250m to US$500m Less than US$250m 4% Head of business unit (BU)/dept. What best describes your company ownership? Family-owned; 4% Publicly listed; 46% Privately owned; 42% Government/stateowned enterprise; 4% Private equity portfolio company; 4% Page 39

40 Proportion of top industries represented Consumer products and retail Technology Automotive and transportation Diversified industrial products Financial services Life sciences Consumer products and retail Technology Financial services Mining and metals Automotive and transportation Construction Oil and gas Telecommunications Power and utilities Real estate Telecommunications Agriculture based Media and entertainment Life sciences Page 40

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