Originally Published by EY.
Encouraged by strong economic conditions in the US, but cognizant of a changing global business and political landscape, 51% of US business executives intend to pursue M&A over the next 12 months, while 54% expect an increase in their deal pipelines over the same time period, according to Ernst & Young LLP’s (EY) twice-annual Capital Confidence Barometer (CCB).
“We saw a booming US economy in the first half of 2018, which helped spur record levels of domestic M&A activity across sectors,” said Bill Casey, EY Americas Vice Chair, Transaction Advisory Services (TAS). “The economic outlook in the US remains positive overall, with strong corporate earnings and low volatility—but executives are pursuing M&A carefully in the face of geopolitical uncertainty, frothy equity markets, and a near-decade-long bull run. These conditions haven’t dissuaded companies from pursuing mergers, but they heighten the importance of due diligence as companies continue to trade at high multiples.”
Amid growing uncertainty over the fate of multilateral institutions, 38% of US executives cited regulation and government intervention, including trade policy and tariffs, as the biggest potential risks to near-term dealmaking. Difficulty in identifying high-quality assets was the second most-cited risk for near-term M&A (26%).
Private Equity, Divestitures Drive Deal Flow
Mindful of an active PE industry with nearly US$360 billion in dry powder, dealmakers are closely following the growth of private equity and other funds as competitors for assets. Fifty-six percent of US executives expect to see more asset competition in the next 12 months, and 52% say PE funds will be a direct source. On a macro level, executives said they expect an increase in private equity acquisitions to be a top theme in M&A over the next 12 months.
The growth of private buy-side capital has coincided with US executives’ increasing focus on divestitures. The overwhelming majority of US executives (92%) say the top result of their most recent portfolio review was divesting an asset identified as underperforming or at risk for disruption. This echoes the recent sentiments in the EY Global Corporate Divestment Study, in which 87% of corporate executives surveyed said they intended to divest within the next two years.
“Investor pressure on companies to either maintain or improve both margins and payouts has only intensified,” Casey continued. “Investors, both activist and institutional, have heightened expectations during this sustained period of record profitability and corporate earnings growth. Private equity, which continues to expand and invest over the medium- and long-term, is a natural acquirer of and steward for those divested assets. Carve-outs and buy-and-builds present an attractive opportunity for private capital in an environment where rates are still low.”
Integration, Workforce, Top of Mind for Dealmakers
M&A integration strategies continue to evolve as acquirers seek to capture synergies between cross-sector workforces and diverse enterprise technologies. Sixty-two percent of executives achieved lower synergies than expected in their most recent transaction, and a majority (56%) say they are starting integration earlier in the M&A process.
“Competition for assets and the subsequent high valuations for acquisitions underline the need for companies to maximize the synergies they capture when integrating a newly acquired business,” said Brian Salsberg, EY Global Buy & Integrate Leader. “As companies make acquisitions outside of their typical comfort zone in order to meet rapidly changing customer demands, they need to throw out the old playbook and tailor their integration approach to each deal.”
The oft-discussed “war for talent” is a key factor in the integration process. US executives identified the onboarding and retaining of talent as the number one challenge they face when integrating an acquired company. Dealmakers’ concerns with talent reflect the business community’s broader concern with workforce issues amid full employment in the US. Seventy-five percent of US executives say their most significant workforce challenge is either retaining existing workers or identifying and hiring people with the right skill sets.
“The tight labor market presents its own set of challenges for businesses around talent acquisition and retention, particularly as technology redefines traditional roles in the workplace,” said Casey. “In particular, US executives are conscious of how their workforces respond to and are affected by mergers because they know that high employee satisfaction and good governance are linchpins of today’s favored corporate culture and thus integral to long-term talent acquisition, development, and retention strategy.”
Dealmakers Eye “Close to Home” Opportunities as Protectionism Grows Worldwide
Nearly all respondents report a primary focus on domestic transactions—however, they say an increased focus on cross-border opportunities would be a possible outgrowth of trade and tariff policy developments.
US executives identified Canada, Brazil, and Mexico as their top deal destinations outside of the US. Interestingly, the United Kingdom has dropped out of the top five ranking. Likewise, nearly half of US executives (49%) think they’ll be less likely to seek financial services advice, products and services from London-based financial institutions once Brexit takes effect.
“Latin America may present an opportunity for US businesses looking to deploy capital, boost their inorganic growth strategies, and take advantage of the privatization of key industries and other pro-business policies throughout the region,” said Casey. “The influence of geographic and cultural proximity is underscored by Canada being selected as one of the top investment destinations abroad for US businesses despite ongoing trade disputes. US executives’ attitudes toward Canada remain positive, a sentiment that looks set to improve further after recent progress on NAFTA renegotiations/trade talks.”
