Can complex geopolitical uncertainty and record M&A coexist? Capital Confidence Barometer July 2017 ey.com/ccb 16th edition Japan Highlights

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1 Capital Confidence Barometer July 2017 ey.com/ccb 16th edition Japan Highlights Can complex geopolitical uncertainty and record M&A coexist? Despite policy uncertainties, companies are giving the green light to deals in the search for growth.

2 Japan highlights M&A outlook Dealmaking is set for a strong Concerns about an overheated market are countered by growing deal discipline. 37% 79% 44% expect to actively pursue acquisitions in the next 12 months expect their pipeline to increase or remain stable in the next 12 months look at cross-border deals to secure market access and grow their customer base Macroeconomic environment Confidence high as executives anticipate the global economy improving and corporate earnings on an upward track. 67% 99% 65% see the global economy improving expect corporate earnings to either improve or remain stable cite a broad range of geopolitical or emerging policy concerns as greatest risks to growth Growth and portfolio strategy As technology disrupts traditional models businesses are more regularly reassessing their portfolios in the search for growth. 69% 76% 52% have increased the frequency of their portfolio review process plan to outsource routine operations or back-office functions in the next 12 months cite portfolio analysis, Sector convergence, digital innovation as most prominent topics on their boardroom agenda 18 Capital Confidence Barometer

3 Japanese economic confidence and strong growth imperative outweigh geopolitical concerns and spur further M&A Based on a survey of more than 2,300 executives across Japan and 42 other countries, the Barometer finds that this strong appetite for deals perseveres against a backdrop of geopolitical or emerging policy concerns, which are seen as the greatest risk to economic growth for 69% of businesses. Resurgent economic confidence and potential rewards of M&A eclipse broader risks Signs of a global economic upturn are boosting renewed expectations for growth, but it is the improving confidence in the Japanese domestic economy that will really underpin growth and further fuel deal intentions. At the same time, investor expectations have also increased. The net result is executives recognize that staying on the deal sidelines could mean they miss an opportunity to secure future proofing assets. Investing globally in a time of rising nationalism Japanese fears of increasing protectionism in 2016 still exist and have morphed into uncertainty about policy that could impact global trade. However, despite trade barrier speculation, cross-border M&A has already been a hallmark of dealmaking in 2017, with a resurgence of deals between the United States (U.S.) and Western Europe. Further, Japanese executives remain more positive than their global peers that the political situations in the US and United Kingdom (UK) will create more M&A opportunities. For many companies, crossborder deals are a necessity successful companies will find ways to navigate challenges such as rising nationalism, and executives are evaluating M&A across a wide range of geographies to secure market access and grow the customer base. Vincent Smith EY Japan Leader Portfolio optimization comes to the fore amid rapidly changing market Executives are also being proactive in reassessing and reorganizing their geographic footprint to be able to quickly pivot in response to any major trade policy changes. They are looking at options given the recent political developments and may need to be able to shift operations quickly to protect globalized operations and supply chains. Disruption drives deals For many executives today, the only constraints are the ones they create. They are imagining a future and are using buying and selling strategies to help realize this vision. Companies are playing on their own terms and utilizing more regular and rigorous portfolio reviews to be strategically nimble and opportunistic. Executives are not being distracted by policy speculation that may or may not have an impact in two years when they need to stay focused on the tech startup that could disrupt their business in two months. M&A is both a protection against that disruption and an opportunity to disrupt the competition. Capital Confidence Barometer 19

4 M&A outlook Growth in Japanese pipelines supports confidence in local and global deal activity Q: Considering the next 12 months, how do you expect your pipeline to change? Increase Percent No change Decrease Apr 17 Oct 16 Apr 16 Executives plan to complete more deals while replenishing their pipelines to enable a range of options, and improving valuations will encourage deal flow. Top five investment destinations 1 Japan 2 China 3 United States 4 India Typically Japanese respondents are more positive about the global economy than local. However, in this CCB we see as an equally positive outlook for both 5 Italy 20 Capital Confidence Barometer

5 Macroeconomic environment Japanese views of strong global economy matched by equally bullish domestic outlook Typically Japanese respondents are more positive about the global economy than local. However, in this CCB we see as an equally positive outlook for both. Having a strong export sector, Japanese companies should benefit from an improving global economy. But, it is an improving situation at home that will really underpin confidence and growth. The local economy shows the potential for improvement and planned infrastructure spending in the next 2-3 years will contribute to this improvement However overall confidence can also be tied to strong sentiment regarding likely improvements in local corporate earnings, credit availability and market stability. Q: Improving Stable What is your perspective on the state of the local economy today? Percent Declining Apr 17 Oct 16 Apr 16 Growth and portfolio strategy Q: Which of the following will be most prominent on your boardroom thinking during the next six months? (Select up to three) Portfolio analysis, including strategic divestment (spin-off/ipo) 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 Identifying opportunities for growth, including M&A, joint ventures and alliances Percent Impact of increased economic and political instability 10 Shareholder activism, including returning cash to shareholders 9 Increasing regulatory or governmental intervention 8 Changes in tax policy/rates 8 As the global economic outlook improves, companies and executives are clearly focused on growth strategies, but the rise of digital disruption to products and business models is the constant central consideration. Japanese executives have indicated they will be more focussed on the state of their own portfolios with a possible pick up in strategic divestments to follow. Sector convergence and a focus on customer will also occupy Japanese boardroom thinking in the year ahead. Capital Confidence Barometer 21

6 10 top actions that help define M&A success in today s deal economy Learn to live with uncertainty Geopolitical and policy uncertainty is a permanent feature of a globalized economy, but technology-enabled disruption poses a greater challenge to many business models. The only constraints are the ones you create New products and services are being created at a pace not seen before being bold could be key to success as today s deals will likely be tomorrow s game-changers. Reimagine the parameters of your business Do what you do best adapt your operating model to succeed in tomorrow s market. Play on your terms Be in total control of your own destiny rigorous and regular portfolio reviews will enable you to be strategically nimble and opportunistic. 16 Capital Confidence Barometer

7 5 6 Your pipeline is your lifeline Competition for quality assets is high, and assessing a number of M&A options is critical to create multiple opportunities in such a fastmoving market. Follow the customer M&A can offer a fast track to the innovation needed to maintain pace with the warp-speed, customer-centric change reshaping today s business landscape. 7 Disregard boundaries Cross-border deals are a necessity successful companies will find ways to navigate challenges such as rising nationalism. 8 9 Walk through walls The traditional walls that once defined sector territories have dissolved executives need to seize opportunities amid shifting industry models. Measure what matters most Past performance is not necessarily an indicator of future success new ways of focusing and filtering data can provide insights into future customer trends. 10 Integrate with intent Always consider your overarching strategy during integration, and enhance potential value by targeting both top-line customer experience and bottom-line cost efficiencies. Capital Confidence Barometer 17

8 Japan contacts For a conversation about your capital strategy, please contact: Vincent Smith EY Japan Leader vince.smith@jp.ey.com Satoshi Yamada Capital Transformation Leader satoshi.yamada@jp.ey.com Global contacts Global Steve Krouskos EY Global Vice Chair EY Global Limited steve.krouskos@uk.ey.com Follow me on Julie Hood EY Deputy Global Vice Chair EY Global Limited julie.hood@uk.ey.com Follow me on Barry Perkins EY Global Lead Analyst EY Global Services bperkins@uk.ey.com Peter Wesp EY Japan Deputy Leader peter.wesp@jp.ey.com Americas William Casey EY Americas Vice Chair william.casey@ey.com Asia-Pacific Harsha Basnayake EY Asia-Pacific Leader harsha.basnayake@sg.ey.com Europe, Middle East, India and Africa (EMEIA) Andrea Guerzoni EY EMEIA Leader andrea.guerzoni@it.ey.com 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 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 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. EYG no GBL ED 1804 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 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 more than 2,300 executives in 43 countries; 58% 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, diversified industrial products, and construction and real estate. Surveyed companies annual global revenues were as follows: less than US$500m (21%); US$500m US$999.9m (23%); US$1b US$2.9b (17%); US$3b US$4.9b (10%); and greater than US$5b (29%). Global company ownership was as follows: publicly listed (62%), privately owned (32%), family-owned (3%) and government-/state-owned (3%).