Business leaders are continuing to reshape their company portfolios despite a challenging geopolitical environment, with 52% of global corporates planning to pursue acquisitions in the next year, according to the 21st EY Global Capital Confidence Barometer (CCB).
The search for technology and talent is driving deals: two-thirds (66%) of respondents plan to allocate more than 25% of their total investment capital to technology, mostly solutions that drive top-line growth. More than half of executives (56%) will invest in technology through acquisition, joint ventures or external venture funds. At the same time, almost two-thirds of respondents (61%) are experiencing difficulties securing the right skills and talent. That number is even higher in the UK (66%) and Germany (72%).
“In terms of investing in new technology, the age-old dilemma to the buy-versus-build question is tilting toward the first alternative,“ says Petr Kováč, Partner at EY´s Transaction Advisory Services in the Czech Republic. “The shortage of talent is a constraint on growth and acquiring the skills needed to underpin future growth is increasingly part of the current M&A story”.
“Thanks to extraordinary pace of technological development and related disruptive trends across sectors we can see considerable tampering of the transaction market with effects that stood outside until recently – laggard pace of change in educational process, changing nature and future of work, concentration of research and development in several top centres and related trend of open science and open data which, on contrary, supply the start-up community” adds Vladislav Severa, Managing Partner of EY’s Advanced Data Analysis Team.
No economic downturn in sight for many executives
The likelihood of a recession in the near- to mid-term is not considered a significant threat: most respondents (54%) are not expecting an economic downturn. While the majority of respondents from most major economies remain confident in their economic outlook, this is deeply contrasted in Germany where 80% expect a downturn and the UK in which 62% expect a downturn. Despite these concerns, the deal market in Germany and the UK has remained active in 2019. Executives in the US are the most bullish with 78% of respondents discounting the chance of significant economic downturn in the near- to mid-term.
Companies are managing through trade and tariff issues that could be perceived as undermining economic confidence. Almost two-thirds of businesses (64%) are actively planning to mitigate the impact of trade and tariff issues in ways such as reconfiguring supply chains and relocating production facilities. A further 22% are actively considering their options to respond to this fast-changing situation.
Variety in competitive and hostile deal making expected
In the context of this bullish economic outlook, the deal market going into 2020 looks set to be highly competitive. Eight in ten respondents expect to see an increase in hostile and competitive bidding in the next year and 75% of respondents expect private equity to be a major acquirer.
Respondents expect increased megadeal activity ($10bn+), with more than half (55%) foreseeing an increase in deals topping the US$10b+ mark. Almost three-quarters (72%) do not anticipate any slowdown in M&A activity overall and a similar number (71%) of corporate executives forecast an increase in cross-border deal making.
“This year seems to be among the top five in history from the viewpoint the value of global transactions. If 4Q 2019 is sufficiently strong we can even rank among the top three. It seems that expectations are firmly anchored in reality and strong M&A activity is at hand”, says Štěpán Flieger, Head of EY’s Mergers & Acquisitions team.
US regains top spot; UK remains attractive to investors
The latest CCB finds the US is the preferred place for M&A investment globally. While Brexit uncertainty continues, the survey finds UK attractiveness strong as investors rank it the second preferred investment destination globally. The US and UK outpace Germany (in third), China (fourth) and Canada (fifth).
“The ongoing trade issues in a number of the major economies have not caused dealmakers to shelve plans” says Petr Kováč and adds: “The imperative to transform outweighs the risk of uncertainty. As long as this continues, the drumbeat for M&A will go on”. Acquisitions and divestitures are standard instruments of management decision-making process. Global corporate leaders learned to work with these instruments. “Deals continue to be powerful means to reshape portfolios and accelerate the transformation imperative facing CEOs”.
Articulating purpose and long-term value creation
Purpose and social impact are rising on the boardroom agendas and are fundamentally reshaping the way companies measure success. Some 84% of companies already have, or plan to have, social value reporting metrics in place for the next year.
“Business leaders are increasingly paying closer attention to investors’ demands to see evidence of broader responsibilities” concludes Petr Kováč. “They are recognizing and responding to the need to be good corporate citizens, knowing that any business on the wrong side of this debate will likely find themselves on the wrong side of history”.