With recent economic data from the US, UK and a few other major economies suggesting a slow but steady return to growth, the outlook for merger and acquisition activity also appears to be getting sunnier after nearly five years of declining or stagnant deal volumes.
According to a survey of more than 1,500 senior executives conducted by the Economist Intelligence Unit in the second half of 2013 for Ernst & Young’s bi-annual Capital Confidence report, two-thirds of dealmakers are expecting a bounce back in M&A activity in 2014. Anecdotal evidence as well as the news flow indicates conditions are ripe for a revival in deal activity.
Most companies have largely implemented the cost-cutting and operational efficiency plans they had to come up with to counter the impact of the global financial crisis a few years ago. Growth is firmly back on the agenda for business leaders but opportunities for organic growth remain fairly sluggish and cheap credit is still plentiful.
That makes a merger or an acquisition all the more viable, particularly with valuations still very attractive, in at least some industries. Japanese drinks-maker Suntory’s recent agreement to buy American rival Beam for $16 billion (£9.7 billion) is just the latest example of companies becoming more opportunistic in order to take advantage of the improving market conditions.
“Barring further shocks, M&A and investing will return to prominence on the capital agenda,” says Pip McCrostie, Global Vice Chair for Transaction Advisory Services at EY. “With companies again allocating more acquisition capital to developed markets such as the UK, US, Japan and Germany — as well as China — these economies are expected to lead the return of M&A. Simultaneously, companies will continue to pursue emerging markets — such as India and Brazil — and frontier markets — such as Vietnam and Indonesia — as growth mandates take hold.”
But the optimism of business leaders is tempered by concerns related to short-term risks. Nearly two in five of those surveyed cited geo-political instability to be the greatest barrier to growth for their business in the next six to 12 months, and just 21% expressed confidence that markets would remain stable over the short term. This suggests that the pick up in deal volumes will be incremental, at least for the foreseeable future.
The latest Capital Confidence Barometer report can be downloaded here
The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of The Economist Intelligence Unit Limited (EIU) or any other member of The Economist Group. The Economist Group (including the EIU) cannot accept any responsibility or liability for reliance by any person on this article or any of the information, opinions or conclusions set out in the article.
