US executives balance exuberance and prudence in a booming M&A market
With mergers and acquisitions in 2015 nearing an all-time record, our 13th Global Capital Confidence Barometer finds US corporate executives both leveraging the opportunities a thriving deal market brings and exercising prudence.
Nearly three-fourths of our US respondents (74%) report M&A plans in the next year. That is an all-time high since we launched the Barometer more than six years ago. A similar percentage of our respondents say the valuation gap between buyers and sellers is small — indicating, in essence, that there’s never been a better time to do a deal.
Yet these same upbeat executives are bracing for headwinds in the next year. They are not just wary of outside forces — from volatility in commodities and currencies, to political instability in the Eurozone, uncertainty in the US Congress as a result of the speaker’s race and the pending debt ceiling limit as well as the potential for a polarizing US presidential election. They are also conservative about the prospects for the domestic deal market, and for corporate earnings amid a persistently low-growth environment. This tempered outlook is reflected in how they are running their businesses. US executives say they are allocating more than half of their available capital to debt reduction and shoring up balance sheets — more than organic and inorganic growth, and shareholder cash deployment, combined.
Healthy, sturdy deal market
As contradictory as these Barometer responses might appear, taken together they bespeak a healthy, sturdy deal market. We see it in the steady growth in pipelines: all of our US respondents are maintaining or growing the number of targets they evaluate. In our last Barometer, the story was of modest-sized US companies coming off the sidelines after years of post-crisis mindset. As the mid-’10s M&A boom broadens and deepens, these companies are not just executing deals, but planning the next ones; one-deal or two-deal pipelines are converting to threes and fours.
We also see it in the positive attitude toward deal fundamentals: the number and quality of opportunities, and the likelihood of closing, are all up solidly from six months to a year ago. Yet even as M&A has grown strongly, virtually all of our respondents tell us they have canceled or walked away from a deal in the last 12 months — a sure sign of a confident market, with dealmakers determined to wait for the right opportunity.
Foundation for growth
One term we might use to describe present-day corporate leaders was coined some years ago by an institute of chartered accountants: “professional skepticism.” It describes those with a questioning mind and a critical assessment of evidence. This neatly sums up the job description of a modern C-suite executive or board member: ingesting a full range of market data and internal metrics, and challenging even the most positive of trends. As shown in this Barometer, US executives are leading the way as the global market’s professional skeptics. Across an entire market, this probity is how an M&A flurry turns into a sustained boom and how dealmaking creates a foundation for future growth.
Find out more at ey.com/ccb
Richard M. Jeanneret is Americas Vice Chair, Transaction Advisory Services, Ernst & Young LLP. [email protected]