8th issue Outlook April-October 2013 Global Capital Confidence Barometer Korea A more cautious local outlook The Korea story About this survey The Global Capital Confidence Barometer is a regular survey of senior executives from large companies around the world, conducted by the Economist Intelligence Unit (EIU). Our panel comprises select Ernst & Young clients and contacts, and regular EIU contributors. This snapshot of our findings gauges corporate confidence in the economic outlook, and it identifies boardroom trends and practices in the way companies manage their capital agenda. Profile of respondents Panel of almost 1,600 executives surveyed in February and March 2013 Companies from 50 countries Respondents from more than 20 sectors 51 794 CEO, CFO and other C-level respondents 912 companies would qualify for the Fortune 1000 based on revenues The Capital Agenda Based around four dimensions, it helps companies consider their issues and challenges, understand their options and make more informed capital decisions. 1. Preserving capital: reshaping the operational and capital base 2. Optimizing capital: driving cash and working capital and managing the portfolio of assets 3. Raising capital: assessing future capital requirements and funding sources 4. Investing capital: strengthening investment appraisal and transaction execution Pip McCrostie Global Vice Chair Transaction Advisory Services Hong-Yeol Yoo Korea Leader Transaction Advisory Services Our eighth bi-annual Global Capital Confidence Barometer finds Korean companies more uncertain about the global economic climate and more pessimistic about prospects at home, despite the rosier sentiment prevailing among executives in other regions. At the same time, Korean companies appear to be much more willing to pursue acquisitions than they were in October; many appear to find M&A an attractive way to increase management efficiency and synergies and achieve the broader optimization of businesses, which is their main focus at the moment. These conflicting attitudes are most evident in the macroeconomic sphere. The number of Korean executives who see the global economy as improving has increased dramatically over the past six months to 35%, although this is still below the more than half of global executives who see an improvement in global economic conditions. More disquieting, perhaps, nearly a third of Korean respondents () believe the global economy is declining, a dramatic rise from the who thought so in October. This apparent paradox reflects two different trends: on the one hand, quantitative easing in both the U.S. and Japan is seen as supporting the global economy; on the other hand, the lagging recovery of the Eurozone, particularly in the shipping and manufacturing industries, and generally lower growth expectations in major economies suggest rocky times ahead. At the same time, confidence in the local economy has deteriorated significantly, weighed down by the depreciation of the Japanese yen, which is making Japanese companies more competitive globally against their Korean rivals. Korean companies are also facing pressures from the continuing Eurozone crisis, which has left major shipping and resources companies and their suppliers with net losses. Finally, heightened tensions with North Korea are creating a more negative environment for foreign investment, although their most direct impact is on companies in Kaesong city. As a result of these factors, a third of respondents are now reporting the Korean economy is declining, up from just six months earlier. Korean respondents also diverge sharply from their global counterparts with respect to their view of credit availability, with just now saying they have a positive view of the global availability of credit, down from 5 in October, compared with 49% of global executives who have a positive view of credit access. Similarly, just 2 say they are confident in their ability to get credit in their home market, compared with 56% who said so in October. This development reflects the fact that global credit cycles no longer synchronize with Korea s credit cycle currently in a declining stage. A more difficult funding environment has dramatically decreased the number of Korean companies listing growth a main boardroom focus, with many more emphasizing cost cutting and efficiency than was the case six months ago. The desire to improve cash balances may be driving the new impetus towards asset sales, which have tripled compared with October. Hong-Yeol Yoo, Korea Leader, Transaction Advisory Services
Economic outlook Koreans hold mixed views on global economy The number of Koreans who believe the global economy is improving has risen sharply to 35% from just in October, although this is well below the 51% of global respondents who see improvement. More significantly, nearly a third () of Koreans think the global economic situation is deteriorating, more than three times the number who said so six months ago, and well above the 13% of global executives who are negative about the global economy. What is your perspective on the state of the global economy today? Local sentiment slides precipitously Koreans are even more pessimistic about the state of their local economy amid regional economic and political pressures and the continuing impact of the Eurozone crisis on corporate earnings for shipping and heavy manufacturing companies. While see the local economy as improving, up from 27% in October, a striking 33% see deterioration, compared with who thought the local economy was declining six months earlier. What is your perspective on the state of your local economy today? 35% Improving Stable Declining 27% Improving Stable Declining 8 36% 86% 3 69% 33% While a higher proportion of Korean executives see improvement in equity valuations, economic and employment growth, and short-term market stability compared to October, the proportion seeing improvement in both corporate earnings and credit availability has plummeted. What is your level of confidence in the following at the global level? Equity valuations/stock mkt outlook Economic growth Employment growth % respondents positive 2 2 17% 2 8% Apr-13 Oct-12 Apr-12 Oct-12 Apr-13 On a local level, the number of Koreans expressing a positive view of corporate earnings has been more than halved to from 67% six months ago, while less than a quarter of respondents (2) are confident about the availability of credit, less than half of the 56% who said so in October. While nearly three-quarters of respondents expect the local economy to grow modestly in the next year, 2 predict zero growth, and negative growth. By how much do you expect your local economy to grow in the next 12 months? More than 5% 3-5% 1-3% Zero growth Negative growth 2 68% Corporate earnings Credit availability 5 6 33% of Korean respondents view local economic conditions as declining compared to only in October 2012 Short-term market stability 2 Global Capital Confidence Barometer
Access to capital Koreans far less confident about credit availability The number of Korean executives saying they are confident about the availability of credit has fallen dramatically, with just saying credit availability is improving, down from 5 in October. Korean respondents confidence was also below that of their global peers standing at 49%, an increase from 26% in October. In addition, the proportion of Korean respondents who believe global credit access is declining has skyrocketed to 41% from just 9% six months ago, and compared with 1 among global respondents. The decline in sentiment is due to the decoupling of global credit markets, which has left the credit cycle in other developed markets such as the U.S. and Japan in the recovery stage, while Korea s credit cycle is in a declining phase. Level of confidence in credit availability at the global level More Korean companies looking to refinance The number of Korean companies planning to refinance loans or other debt obligations over the next 12 months has increased significantly to 41%, up from 8% in October, as companies take advantage of declining interest rates that make it advantageous and convenient to refinance than look for other funding sources. Just over a third of Korean respondents say their main motivation for refinancing would be to reduce interest costs. By contrast, just 29% of global companies say they will refinance in the next 12 months, similar to the 26% who said so in October. Does your company plan to refinance loans or other debt obligations in the next 12 months? 8% Yes 41% No Improving Stable Declining 8 9 59% 5 39% 9 37% 41% 6% 9% Global respondents Given the tighter credit environment and tendency for companies to concentrate on optimization of their businesses, it is hardly surprising that more than two-thirds of Korean companies (67%) say cash will be their primary source of deal financing in the next 12 months, up from 15% six months ago. What is the primary source of your company s deal financing in the next 12 months? Cash Debt Equity 3 26% 49% 15% 45% 4 57% 75% 67% 37% 25% 3 1 29% 1 Global Capital Confidence Barometer 3
Growth Strategies Appetite for growth wanes Korean executives are far less likely to report an appetite for growth than six months ago, with the majority focusing on cost reduction and operational efficiency as they continue to face the increased competition driven by the depreciation of the Japanese yen and the pressure on corporate profits from the extended Eurozone recession. % Focused on Growth Global South Korea Just 2 of respondents say their company s main focus will be growth over the next 12 months, down from 46% in October, and less than half of the 5 of global respondents who say their firms will concentrate on growth. Which statement best describes your organization s focus over the next 12 months? 9 8 7 6 5 4 3 5 49% 65% 5 46% 41% 5 2 46% 13% 5 19% 35% 1 3% Oct-12 Apr-13 Growth Cost reduction and operational efficiency Maintain Stability Survival 2 Apr-11 Oct-11 Global respondents 41% 5 25% 15% 3% Oct-12 Apr-13 5 of Korean respondents say they will focus on cost reduction and operational efficiency over the next 12 months 4 Global Capital Confidence Barometer
Mergers and acquisitions outlook Koreans more bullish about M&A, but still cautious compared to global peers Just under a third of Korean executives (29%) say their company plans to pursue acquisitions during the next year, up sharply from just 6% in October and roughly equivalent to the of global companies that plan to do deals. Korean companies increasingly find M&A an attractive way of improving management efficiency and synergies and restructuring overlapping businesses. Expectations for improved valuations, as outlined on the next page, may also be driving the increased appetite for acquisitions from Korean respondents. Do you expect your company to pursue acquisitions in the next 12 months? Small deals likely to dominate next 12 months Korean companies, like their global counterparts, expect to focus on smaller deals over the next 12 months, with nearly half (49%) saying they expect deal sizes to be US$50 million or less, up from 33% in October and just 35% of global respondents who gave the same answer. This finding suggests both the cautious sentiment of Korean companies in the wake of a weak global economic recovery and the effect of proposed government support for small and medium-sized businesses. On the other end of the scale, the number of Korean executives predicting deal sizes of more than US$1 billion in the next year has risen to 1 from zero in October. What is your expected deal size? 6 5 4 3 Expectations to pursue an acquisition Global China China Korea 5 5 5 4 4 41% 41% 4 4 41% 38% 38% 35% 35% 3 3 25% 25% 25% 29% 2 2 67% 29% 29% 29% 29% 1 13% 26% 49% Over US$1bn US$501m-US$1bn US$51m-US$500m US$50m or less 6% 11% 11% Apr-11 Oct-11 Apr-11 Oct-11 33% Oct-12 Apr-13 Although 57% of Korean respondents expect a modest or strong improvement in global M&A deal volumes over the next 12 months, this is lower than the 69% of global respondents who said the same. On the contrary, the proportion of Korean respondents expecting the volumes to remain the same was higher than that of global respondents with the same view. Korean views on local deal volumes showed a similar trend. What is your expectation for global M&A/deal volumes in the next 12 months? Return to historic highs Strongly improve 3% 17% Global Korea The top destinations for Korean outbound investment are China, India, the U.S., Brazil and Vietnam, with the first three notable for the size of their consumer market and the last two attractive in part due to their high growth rates. Which are the top 5 countries in which your company is most likely to invest? 1 2 3 3= 3= China India US Brazil Vietnam Modestly improve 5 55% Remain the same Modestly decline 6% 23% 37% 57% of Korean respondents expect global deal volumes to improve over the next 12 months, compared to 69% of global respondents Strongly decline 1% Global Capital Confidence Barometer 5
Mergers and acquisitions outlook Valuations concerns subside somewhat Korean respondents outlook for asset prices has improved, which may be one of the factors supporting the increase in their appetite for acquisitions. Some 49% of Korean respondents now say they expect asset valuations to increase over the next 12 months, compared with 15% six months earlier. 43% expect valuations to remain at current levels, up from 17% in October, and just 8% of Korean respondents expect prices to fall, compared with the 68% who expected a devaluation of prices six months ago. What do you expect the price/valuation of M&A assets to do over the next 12 months? Koreans more willing to sell assets The number of Korean companies considering divestments over the next 12 months has risen to from 6% in October, in line with the intentions of global companies. A key driver of this may be Korean corporates desire to increase their cash balances due to uncertainties about the economic outlook. In addition, the Korean government s potential sale of its stakes in corporates may be a contributing factor. Of those planning a divestment, the majority (67%) say that enhanced shareholder value is the main driver. Is your company likely to make an asset sale/divestment in the next 12 months Increase 16% 15% 6 17% 68% Remain at current levels 49% 43% Decrease Meanwhile, for those opting out of the M&A market in the next year, the bulk of respondents (4) say a lack of access to funding is the main reason for not pursuing acquisitions, in line with wider concerns about credit availability. In line with the improved sentiment on valuations discussed above, those citing the valuation gap as the primary reason for not pursuing acquisitions reduced to 17%, compared to 41% in the October 2012 survey. 8% Apr - 12 Oct - 12 Apr - 13 4 3 5 5 4 4 3 3 3 4 4 38% 38% 26% 12 month outlook 41% 41% 35% 35% Global 19% 2 2 China China Korea 25% 25% Apr-11 Oct-11 29% 29% 29% 29% 1 11% 11% 6% Apr-11 Oct-11 of Korean respondents are likely to make an asset sale/divestment in the next 12 months Global Capital Confidence Barometer 6
Survey demographics (Korea) What are your company s annual global revenues in US$? What is your position in the organization? C-level executive 61% 37% 1 Head of BU/dept. 33% Less than $500m $500m to $999.9m $1b to $4.9b $5b or more SVP/VP/director 6% What best describes your company ownership? Publicly listed 8 Privately owned 6% Participants were representatives from the financial services, power and utilities, automotive, technology, mining and metals, consumer products, diversified industrial products, media and entertainment, and life sciences industries. Family-owned Government/stateowned enterprise Private equity portfolio company 8% 7 Global Capital Confidence Barometer
Contacts If you would like to discuss your company s capital agenda please contact your Ernst & Young advisor, or any of the contacts listed below. Transaction Advisory Services Name Telephone Email Pip McCrostie Global Vice Chair John Hope Asia-Pacific Leader Hong-Yeol Yoo Korea Leader +44 (0) 20 7980 0500 pip.mccrostie@uk.ey.com +852 2846 9997 john.hope@hk.ey.com +82 2 3770 0860 hong-yeol.yoo@kr.ey.com Ernst & Young Assurance Tax Transactions Advisory About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 167,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. Ernst & Young refers to the global organization of 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 www.ey.com About Ernst & Young's Transaction Advisory Services How organizations manage their capital agenda today will define their competitive position tomorrow. We work with our clients to help them make better and more informed decisions about how they strategically manage capital and transactions in a changing world. Whether you're preserving, optimizing, raising or investing capital, Ernst & Young's Transaction Advisory Services bring together a unique combination of skills, insight and experience to deliver tailored advice attuned to your needs helping you drive competitive advantage and increased shareholder returns through improved decision making across all aspects of your capital agenda. About this survey Ernst & Young s Capital Confidence Barometer is part of Growing Beyond, our flagship program exploring how companies are finding new opportunities in challenging economic times. Acknowledgements Our special thanks go to the Global Capital Confidence Barometer panel* for their contribution to this survey. * The panel is comprised of EIU senior executives and selected Ernst & Young clients and contacts who participate in the Capital Confidence Barometer on a biannual basis. The surveys are conducted on an independent basis by the EIU. 2013 Ernst & Young Had Young 2013 Ernst & Young Advisory Inc. All Rights Reserved. FEA no. 05000696 This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither the Ernst & Young Korea practice nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor. www.ey.com/kr ED None.