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. Global Capital Confidence Barometer June 2017 16th edition Hospitality The better the question. The better the answer. The better the world works.
About the study EY s Capital Confidence Barometer is a regular survey of senior executives from large companies around the world, conducted by Euromoney Institutional Investor Thought Leadership. The respondent community comprises an independent panel of senior executives and select EY clients and contacts. Our 16th 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. Participant profile: Euromoney panel of more than 2300 senior executives surveyed in March and April 2017 Respondents from 14 industries, including 49 from Hospitality Companies from 43 countries 1168 CEO, CFO and other C-level executives Produced in association with Page 2
Hospitality key findings M&A outlook Dealmaking is set for a strong 2017. Concerns about an overheated market are countered by growing deal discipline. 51% expect to actively pursue acquisitions in the next 12 months 92% expect their pipeline to increase or remain stable in the next 12 months 22% 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. 76% see the global economy improving 100% expect corporate earnings to either improve or remain stable 71% cite a broad range of geopolitical or emerging policy concerns as greatest risks to growth Growth and portfolio strategy As technology disrupts business models and customer behaviors, businesses are more regularly 76% reassessing and reinventing their portfolios. 49% have increased the frequency of their portfolio review process plan to outsource routine operations or back-office functions in the next 12 months 50% cite digital innovation, the search for growth and sector convergence as most prominent topics on their boardroom agenda Page 3
Macroeconomic environment Page 4
Positive data boosts executives bullish global economic outlook What is your perspective on the state of the global economy today? 76% Improving 32% 36% 18% Stable 39% 51% 6% Declining 29% 13% Apr-17 Oct-16 Apr-16 *GDP growth = same as 2016 Page 5
Capital markets remain open and supportive of companies growth strategies Please indicate your level of confidence at a global level in the following: Corporate earnings Credit availability Short-term market stability Equity valuations/ Stock market outlook 55% 39% 65% 29% Improving 44% Improving 39% Improving 44% Improving 29% 46% 41% 48% 34% 45% 47% 27% 31% Stable 32% Stable 32% Stable 47% Stable 59% 47% 49% 36% 48% 0% 14% 8% 40% Declining 24% Declining 29% Declining 9% Declining 12% 7% 10% 16% 18% Page 6 Improving Stable Declining Apr-17 Oct-16 38% Apr-16 4% 58%
A return of high volatility is the key risk, but governmental intervention a new concern What do you believe to be the greatest economic risk(s) to your core business over the next 6 12 months? (Select up to three) High volatility in currencies, commodities and other capital markets 20% 19% Increasing government intervention in corporate decision-making 18% 15% Restrictions on the free movement of employees/barriers to travel 15% 14% Slowdown in global trade flows/increase in protectionism 15% 13% Uncertainty about US Government policy 10% 10% Increasing global geopolitical instability 8% 12% Cybersecurity threats 6% 8% Economic and political instability in the European Union 5% 5% Financial instability in China, including levels of corporate debt 2% 4% Other 1% 0% Hospitality Global Politics coming to the fore as a key economic risk: Any return of the high levels of market volatility that sporadically shocked markets during the past three years is the major worry for executives and companies. The extra burden on decision-making has been shown to slow investment strategies. Increasing intervention by governments, both through establishing new laws or regulations and through vocal public pronouncements, is high on the list of potential impediments to growth over the next year. With many companies operating a globalized and flexible workforce, any restrictions on the ability to shift staff across borders could have a negative impact on companies business models. The potential for a slowdown in global trade and an increase in protectionism is potentially being elevated by uncertainty about US Government policy in this key area. Page 7 Commentary addresses global results
Macroeconomic insights Confidence is high as executives see the global economy improving 76% see the global economy improving 100% expect corporate earnings to either improve or remain stable 71% cite a broad range of geopolitical or emerging policy concerns as greatest risks to their business A resurgence of economic confidence is fueling growth plans and greater stability in capital markets is expected to foster investment while rapid disruption, political change and policy uncertainty remain. Learning to live with uncertainty Geopolitical and policy uncertainty is a permanent feature of a globalized economy, but technology-enabled disruption poses a greater challenge. Even as geopolitical unrest and policy uncertainty remain elevated, there are signs of a global economic upturn. While this outlook may give a boost to companies existing operations, it is also elevating investor expectations. To meet these stretched targets, companies will look to capture this organic growth and compound it with dealmaking strategies. The positive shift in economic outlook and improving stability in capital markets should reassure executives that they do not need to rush into fundraising or refinancing. Page 8
Growth and portfolio strategy Page 9
Improving economic fundamentals reflected in small shift to organic growth expectations From where do you see growth within your company over the next 12 months? Global 58% 55% Executives looking at a boost to organic growth, but not at the expense of all inorganic strategies: 24% 23% 11% 13% 7% 9% Organic M&A JVs Alliances Hospitality respondents 52% 50% Apr-17 Oct-16 While the improving global economic landscape will provide a boost to organic growth in the next 12 months, executives are still looking to M&A, joint ventures (JVs) and alliances to provide a significant input. It is critical that executives look to capture the growth from an improving economic outlook while still focusing on dealmaking to provide further acceleration. With over 40% of growth expected to come from dealmaking, executives are looking at all avenues to support future growth. 27% 24% 14% 11% 10% 12% Alliances and JVs are seen as equally important as M&A to executives growth strategies. This trend has been reinforced by companies looking to combine with disruptive start-ups or with players from other sectors. Organic M&A JVs Alliances Page 10 Commentary addresses global results
Executives looking at all capital management strategies to boost returns On which of the following capital management issues is your company placing the greatest attention and resources today? (Select up to three) Organic growth (e.g., investing in products, R&D, talent, innovation, digital) 26% Inorganic growth (e.g., acquisitions, alliances and JVs) Improving tax structure Improving working capital management to release cash 13% Strategic portfolio review/capital allocation Optimizing balance sheets, improving capital structure 11% 12% 12% 12% 12% 16% 16% 19% 23% 28% Executives are focused on financial and operational efficiencies to help enhance improving growth prospects: The continuing balance between growth and efficiency is a hallmark of the post-global financial crisis mindset among executives. The need to retain financial and operational discipline has been embedded during the rise of activist shareholders in previous decades. Executives are determined not to permit any open avenues of questioning on such issues. Operational vigor around working capital management, optimizing balance sheets and tax structure will also help release cash for investment or enable more favorable terms for fundraising. Hospitality Global Page 11 Commentary addresses global results
Executives seek to maximize skills and flexibility within the workforce With regards to employment, which of the following does your organization expect to do in the next 12 months? (Select all that apply) Maintain current workforce size 14% 18% Create new jobs/hire people Shift skills and talent within our business 17% 20% Relocate people to other geographies Reduce workforce numbers 13% 17% 17% 18% 13% 14% Re-skill/train our people to better respond to technology changes 11% Automate more roles within the workforce 13% 7% 8% Domestic International Page 12
Companies transitioning to capture digital opportunities face many hurdles What do you think is the most difficult part of digital transformation? Implementing and enabling a digital innovation culture through change management Understanding and delivering on changing customer digital expectations Establishing a common vision, strategy and clarity of plan in the organization Leveraging digital best practice from acquired companies or successful competitors 14% Fully capturing the cost saving and potential value creation of digital transformation 14% Maintaining competitive position as competitors adopt new technologies 8% 18% 18% 28% Page 13
Improving their ability to attract, train and retain people is the key question for executives In the search for growth, what is the most important question business leaders need to find answers for in today s business environment? How can businesses improve their ability to attract, train and retain the people and skills required for future challenges? 33% How can I future proof my business in an age of constant change and disruption? 31% How can I ensure the benefits of growth are shared to the benefit of all stakeholders? 20% How can I ensure purpose and profit are not mutually exclusive? 16% Page 14
Emerging pressures help to reinvigorate companies portfolio review processes Have you increased the frequency of your portfolio review process to capitalize on disruptive forces in your sector? Yes 76% No 24% Have you begun actively reorganizing your geographic operations in response to potential changes in trade policies? 45% 37% 18% Yes, we have No, but we plan to No plans to Page 15
Outsourcing backroom functions will help boost efficiencies and returns Do you plan to sell or outsource any routine operations or back office functions in the next 12 months? Yes 49% No 51% If yes, select all of the following broad areas that apply: Knowledge, information, research IT operations Finance 29% Marketing 25% Human resources 21% Other 13% 38% 42% Page 16
Executives looking outside for innovation What are your main strategic drivers for pursuing an acquisition, JV or alliance outside your own sector? (Select up to three) New product or service innovation Reacting to competition Changes in customer behavior Access to differentiated customers, details or databases Access to new materials or technologies/digitalization 10% 17% 18% 21% 26% Acquiring talent Securing supply chains 3% 5% Page 17
Brand recognition a key reason for alliances and JVs What are the main reasons for entering an alliance or JV as opposed to making a full acquisition? (Select up to three) Brand recognition of the partner selected in the geography/product area Easier to pursue several options concurrently Lower risk/capital investment than a full acquisition 13% Faster access to innovation 12% Sharing of capital investment in the market opportunity 10% Access to developed infrastructure/supply chains 9% Blocking a competitor from working with that partner in the future 8% To maximize value of a non-core asset 5% Regulatory requirements within the given market 4% Access to talent 3% 16% 20% Page 18
Many executives comfortable with their alliance process, but a minority struggling Is there a different level of due diligence performed for alliances as opposed to JVs or M&A? Yes 76% No 24% Do you think the level of diligence you perform on alliances is adequate? Yes 63% No 37% Do you have a formal process to evaluate and capture synergies and value created by alliances? Yes 82% No 18% Page 19
A clear focus on digital technology Which of the following will be most prominent on your boardroom thinking during the next six months? (Select up to three) Impact of digital technology on your business model; e.g., new sales channels/markets, IoT, cybersecurity Sector convergence/increased competition from companies in other sectors 15% Shareholder activism, including returning cash to shareholders 15% Identifying opportunities for growth, including M&A, JVs and alliances 15% Portfolio analysis, including strategic divestment (spin-off/ipo) 11% Changes in tax policy/rates 9% Impact of increased economic and political instability 9% Increasing regulatory or governmental intervention 6% 20% Page 20
Growth & portfolio strategy insights As technology disrupts traditional models businesses are more regularly reassessing and reinventing their portfolios in the search for growth. 76% have increased the frequency of their portfolio review process Emerging pressures help to reinvigorate portfolio review processes 49% plan to outsource routine operations or back-office functions in the next 12 months and outsourcing backroom functions will help focus on core operations 50% cite digital innovation, the search for growth and sector convergence as most prominent topics on their boardroom agenda as companies look to counter disruption and accelerate growth. Balancing disruption and convergence is driving the corporate agenda Geopolitical issues may dominate the headlines, but boards are laser-focused on countermeasures against disruption and seizing new routes to growth. The accelerating pace of innovation and competition across sectors is encouraging executives and companies to review and reorganize their portfolios more frequently, enabling them to capitalize on emerging growth opportunities. Outsourcing non-core operations enables management to better allocate time and resources to focus on core activities, resulting in higher returns. Page 21
M&A market outlook Page 22
Above-trend appetite for M&A should drive elevated dealmaking in 2017 Do you expect your company to actively pursue mergers and acquisitions in the next 12 months? 71% 60% 41% 38% 40% 50% 31% 25% 29% 50% 35% 38% 30% 36% 56% 40% 56% 59% 50% 50% 33% 57% 56% 56% 51% Hospitality average 46% 22% 21% Average Hospitality Global 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 abr.-17 Continuing high levels of dealmaking expected to remain through the near term: The strong finish to 2016 and elevated dealmaking so far in 2017 are helping keep executives intention to enter into deals themselves well above trend. While improving economic conditions will underpin some growth, heightened investor expectations will keep deal flows at near-record levels. Page 23 Commentary addresses global results
Even after a strong year of deal making in 2016, executives signal more deals to come What is your expectation for the global M&A market in the next 12 months? 45% Improving 29% 46% 47% Stable 59% 44% 8% Declining 12% 10% Apr-17 Oct-16 Apr-16 Page 24
Deal fundamentals remain supportive of M&A, but some negative pressures emerging Please indicate your level of confidence at a global level in the following: Number of acquisition opportunities uality of acquisition opportunities Likelihood of closing acquisitions 51% 63% 51% Improving 53% Improving 47% Improving 32% 54% 51% 28% 24% 27% 41% Stable 47% Stable 50% Stable 59% 39% 39% 59% 24% 10% 8% Declining 0% Declining 3% Declining 9% 7% 10% 13% Declining Apr-17 Oct-16 4% 38% Apr-16 58% Page 25
Stability in asset pricing will encourage deals to be struck in 2017 Considering the next 12 months, how do you expect the price/valuation of assets to change? Increase Stay the same Decrease 21% 16% 18% 28% 33% 38% 41% 49% 56% What is your largest planned deal size in the next 12 months? Apr-17 Oct-16 Apr-16 <US$250m 64% US$251m-US$500m 36% US$501m-US$1b 0% US$1.1b-US$5b 0% US$5b+ 0% Apr-17 Page 26
Plans to replenish pipelines are a clear signal that the M&A cycle is far from over How many deals do you currently have in your pipeline, regardless of deal size? 5+ 24% 4 12% 3 4% 2 20% 1 40% Apr-17 Considering the next 12 months, how do you expect your pipeline to change? 44% Increase 21% 21% 48% No change 63% 68% Decrease 8% 11% 16% Apr-17 Oct-16 Apr-16 Page 27
40% of companies are looking to increase their completion rates in 2017 How many acquisitions do you expect to complete in the next 12 months? 5+ 8% 4 4% 3 13% 2 17% 1 58% Apr-17 What is your expectation for deal completions in the next year versus the past 12 months? 40% Increase 20% 47% 48% No Change 42% 65% Decrease 12% 11% 15% Apr-17 Oct-16 Apr-16 Page 28
A strong focus on growth underpins dealmaking intentions What are the main strategic drivers for pursuing acquisitions? (Select up to three) React to customer behavior Move into new geographies Grow market share Acquiring technology or new production capabilities 9% 17% Acquiring talent 6% 7% Secure supply chain 1% 3% 12% Acquiring innovative start-ups 12% 10% 22% 24% 24% 26% 27% Executives looking firmly forward as they seek to do deals to grow the top line: Strategic growth remains at the forefront of boardroom agendas, and companies look set to retain their focus on expansion to tap into new areas of growth. Furthermore, M&A could provide the fastest route to future-proof the businesses to survive in the current environment of technological innovation and digitalization. The emergence of new business models and continued transformation of the market may impel companies to look for acquisitions to survive in this disruptive environment. The next year is also expected to see more acquisitions aimed at enhancing and reorganizing current business models and platforms to counter increasing competition, to gain new customers and to extend product offerings. Hospitality Global Page 29 Commentary addresses global results
Concerns about an overheated market are countered by growing deal discipline Have you either failed to complete or cancelled a planned acquisition in the past 12 months? Yes 80% No 20% If yes, what was the reason? (Select up to three) Issues uncovered during due diligence 38% Concerns about regulatory or antitrust reviews 36% Concerns about cybersecurity 36% Unforeseen tax implications 33% Competition from other buyers/disagreement on price/valuation 33% Economic and political instability 28% Intervention by activist investors 26% Size of target company s pension deficit or other unfunded liabilities 5% Page 30
Hospitality top investment destinations With highest intention to pursue acquisitions Top 5 investment destinations 1 US 2 China 3 Singapore 4 Brazil 5 Mexico Page 31
M&A market insights Near-term dealmaking is expected to remain at high levels. 51% expect to actively pursue acquisitions in the next 12 months 92% expect their pipeline to increase or remain stable in the next 12 months 22% look at cross-border deals to secure market access and grow their customer base Emerging pressures help to reinvigorate portfolio review processes and outsourcing backroom functions will help focus on core operations as companies look to counter disruption and accelerate growth. Indicators point to a healthy deal market in 2017 and beyond. Executives plan to complete more deals while replenishing their pipelines to enable a range of options. Page 32
M&A emerging trends Page 33
Cross-border deal making is key for 2017 What will be the main themes of M&A in the next 12 months? (Select up to three) An increase in cross-border dealmaking as companies look to secure supply chains and market access 22% A return of private equity as a major acquirer of assets 17% A return of megadeal M&A activity 14% An increase in activist investor intervention in M&A, putting pressure on boards to negotiate deals 14% An increase in hostile and competitive bidding as companies focus on growth through acquisitions 14% An increase in acquisitions of innovative start-ups by larger, established competitors 10% An increase in investment in infrastructure projects and privatization of government assets and operations 9% Page 34
US policy takes center stage as executives consider potential impact on M&A Are recent policy announcements by the new US Administration creating more or fewer M&A opportunities? More 33% No impact 36% Fewer 31% Are you factoring the possibility of trapped cash repatriation and the potential revising of the US corporate tax code into your M&A strategy? Yes 45% No 55% Page 35
Brexit and EU stability providing potential barriers and opportunities to dealmakers Has the greater clarity about the likely route of Brexit increased or reduced the likelihood of investing in the UK? Increased 22% No impact 54% Reduced 24% Has the growing support for anti-eu parties in upcoming elections in the EU increased or reduced your likelihood of investing in the region? Increased 20% No impact 49% Reduced 31% Page 36
Participant profile Page 37
Survey demographics What are your company s annual global revenues? What is your position in the organization? >US$10b 16% C-level executive 51% US$5b US$10b 6% Senior VP, VP, Director 22% US$3b US$5b US$1b US$3b 12% 14% Head of business unit/dept. 27% US$500m US$1b 24% US$250m US$500m 28% What best describes your company ownership? Government-/state-owned enterprise, 4% Publicly listed, 51% Privately owned, 41% Family owned, 4% Page 38
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