According to EY’s 11th bi-annual Global Capital Confidence Barometer (CCB), 40% of companies anticipate pursuing acquisitions in the next 12 months – the highest number for three years. More robust market conditions and expanding deal pipelines should see global M&A return to 2006 pre-crisis volume and value levels after a five-year deal slump. While 2014 has been notable for high-profile mega-deals, the Barometer suggests that mid-market M&A will provide significant lift to deal activity. Almost two thirds (60 %) of respondents expect deal volume to increase further in the next 12 months – even after a relatively positive 2014 for M&A.
The biggest indicator of positive deal sentiments is pipeline. Deal pipelines have increased by a remarkable 30% since April. In addition, two thirds of executives expect M&A pipelines to expand further over the next year — this is more than double the number expecting expansion six months ago. Companies are planning to strengthen and expand the core, and they are assessing a range of transaction drivers — but cost efficiencies are paramount. Consequently, for the vast majority of companies, planned M&A activity will consist of bolt-on acquisitions that will complement current business models or be in adjacent sectors.
The respondents see greater stability in the global economy, and this combined with consensus around a smaller valuation gap and stability in assets pricing is encouraging many companies to re-enter the deal market. While the survey highlighted a return of geopolitical issues as the main concern impacting future growth strategies, many respondents appear to now be able to navigate such issues, unlike in prior years when it would have derailed an M&A upturn.
The situation for UK CCB respondents is less clear-cut. Many of the survey’s UK results are in line, or better, than global peers – especially around questions of stability in the global and local economy, corporate earnings and other market indicators. However, there is less intention to do deals in the next 12 months, despite reports of robust and increasing pipelines, confidence in M&A markets globally and in the UK, and a small and stable valuation gap.
Our analysis of 2014 UK M&A using Dealogic data, shows a marked increase in value over the same period in 2013 and a slight uptick in volumes, especially with outbound acquisitions. The value of assets abroad being acquired by UK companies has doubled over last year, with volume increasing by 26%.
It may be that we are at an inflection point for UK M&A. But, with worries over the Eurozone, the General Election in 2015, and the associated questions over future relations with the EU, we will have to see more positive data in UK involved M&A to call a turn-around.
Quite European – Mr. Draghi sets out ECB path
European equity markets sighed with disappointment after Mr Draghi didn’t come back with at least a hint of a fully-fledged QE programme last Thursday. The prospect was surely remote – the ECB always appearing minded to wait until after the AQR results (due late October) before taking such a significant step. The asset purchase programme announced – albeit in limited detail – is still a departure for the ECB. The agreement to buy up around €1 trillion of covered bonds and ABS – including purchases from banks that created them and ‘junk’ Greek and Cypriot loan bundles – would have taken considerable negotiations, even if conditions apply. Greece and Cyprus need to keep in the programme to keep their assets eligible.
Is it enough? With inflation now at 0.3% and growth barely readable, QE ‘bazooka’ demands are understandable. However, monetary policy is surely at the limit of its powers. Italian 10 year benchmark yields have dropped from 7% at the start of 2012 to 2.3% at the close last week – and this still hasn’t been enough to kick start the economy. Another 0.5% wouldn’t seem to be the answer. What is needed is what Mario Draghi also called for on Thursday: reforms to promote growth and greater consumption from surplus nations. The region needs to deleverage. It needs to recognise its bad debts via the AQR and clear out the dead wood – more on that soon.
Can the US Dollar save the Eurozone?
It’s no surprise that the US$ has appreciated against the Euro over the past few months, given the contrast between the seemingly endless run of positive economic news coming out of the US and the distinct opposite from the Eurozone,
The Bloomberg Dollar Spot Index gained for a seventh week, the longest rally in four years, as US job gains highlighted a widening gap between the Fed’s move toward higher interest rates and further stimulus in Europe and Japan. The Euro fell to a two-year low as ECB held interest rates at a record low and announced details of its asset acquisition programme.
This is not necessarily a bad thing for the Eurozone. As our recent assessment of the area highlighted, upside risks include boosted exports by a weaker Euro and stronger world demand. This would be similar to the rebound the UK experienced after “Black Wednesday” in 1992. With a much weaker currency the UK was able to power ahead, increase export earnings and report an astounding 63 quarters of positive performance.
The weakened Euro may become the ECB’s biggest and most effective weapon against recession and deflation.