The latest Global Capital Confidence Barometer from the global professional services firm EY paints a distinctly upbeat picture of the outlook for M&A for the foreseeable future. Indeed it suggests that the whole M&A market has changed in a way that is likely to have enduring benefits for dealmakers.
Speaking to Acquisitions Daily, Steve Krouskos, EY’s Global Vice Chair of Transaction Advisory Services and the chief author of the report, spoke of: “a green light for deal making” as a result of the forces at work in global markets.
Krouskos talks of the world being “in the early part of the fourth industrial revolution”, and says that the ramifications of this for the strategy of most companies can hardly be underestimated. The impact of technological disruption has become more evident and more pressing in a way that demands a response from almost all companies. In a growing number of cases M&A is an integral part of that response, and in Krouskos’ view this is often a more powerful dynamic than short-term tactical considerations as to the state of the economic cycle.
This technological disruption is at the heart of the bullish case. Krouskos says that there is diruption across all sectors. This is not just in the most obvious cases such as automotive, where a completely new paradigm is forming, but in sectors such as consumer and retail, healthcare and industrial products, which some might not immediately expect to be so affected by disruption.
Krouskos cites L’Oreal’s acquisition of IT Cosmetics as a classic example of needing to open up new channels and respond to online pressures. Indeed he adds that European outbound deal flow has clearly been strengthened by the dynamics at play. The US$800bn or so of dry powder that global private equity has to deploy at a time of low interest rates is a further reason for great optimism.
In any case, Krouskos stressed that confidence among the 2,300 senior executives surveyed across 43 countries for the report has improved by many measures. Notably 64% of those surveyed think that the state of the world economy is improving, compared to only 21% last year, and 56% expect to do a deal this year.
Meanwhile 69% of respondents see geopolitics as their greatest concern. Krouskos explains that this is an opportunity as well as a threat. For many, it adds to the imperative to have a global business to offset the risks in particular countries. And, while there has been much publicity of late about the negative impact of elections in the US, Netherlands and France among other places on M&A activity, Krouskos suggests that this has sometimes been overstated. Elections are hardly a new or temporary phenomenon after all, he points out; and EY’s experience is that if there is paralysis it only lasts for 4-6 weeks before an election. Executives can’t afford to wait forever until all uncertainties dissipate.
However, protectionism is indeed a growing factor for companies seeking to do international deals. Krouskos says that this does not mean that companies are shying away from international markets, but it does mean that protectionism-related issues have come to the forefront of consideration in many international deals. This includes talking to regulators before deals are announced and giving careful thought as to which operations may be divested, to whom and at what price, in order to get a deal passed.
This exercise is much aided by the the improvement in analytics which is a direct result of advances in IT. Krouskos emphasises that the transformation in this over the last five or six years is greater than many instinctively recognise. Not only is this important if encouraging deal flow, enabling companies to do deals more quickly and more confidently than in the past, but it also means many of the old paradigms about the failure rate of deals is almost certainly now outdated to the point of irrelevance. The quality of due diligence has been transformed by these analytics, in a way which means that unwelcome surprises should be much lower than in the past.
This is just one of many ways in which the world is changing for the better for deal makers. While it would be foolish to deny that cyclical pressures will bring a slowdown at some stage, for now the outlook looks rosy, and many of those that do not have M&A as part of their strategic armoury should surely ask themselves if there are missing a trick.