Encouraged by recent policy changes and positive economic growth, 86 percent of executives surveyed expect the global M&A market to improve over the next 12 months, according to Ernst & Young LLP’s twice-annual Global Capital Confidence Barometer. In the U.S., 72 percent expect the domestic M&A market to improve, a considerable uptick from 25 percent of respondents six months ago. EY surveyed more than 2,500 executives from 43 countries for the survey, including more than 500 executives in the U.S.
The polled executives are feeling good about the economy, with 96 percent in the U.S. indicating that economic conditions are stable or improving. They’re also optimistic about dealmaking, with 54 percent of the U.S. executives surveyed expecting to actively pursue M&A, a climb of 12 percent since October 2017. Also, 61 percent expect their pipeline of potential M&A deals in the next 12 months to grow, which is three times higher than the percentage reported one year ago.
C-suite executives report dealmaking discipline. Executives say they have maintained the ability to say “no” to potential deals. Of the U.S. executives surveyed by EY, 66 percent say they failed to complete or have walked away from a deal in the past 12 months.
Deal discipline is one reason 2018 looks to be a healthy year for M&A—a deal market that is “robust but not overheated,” according to the report. Surveyed executives are also mindful of valuations and a shifting landscape of governmental or regulatory intervention in dealmaking. Globally, 37 percent see regulation and government intervention as a major risk to M&A.
The survey also shows that acquisitive companies are increasingly interested in making deals to rapidly add talent and innovation, rather than building staff organically, especially for highly technical skills or jobs associated with the digital economy, says Bill Casey, vice chair of transaction advisory services for EY Americas. More than half of executives say they are struggling to identify and hire people with the right skills.
“The fact is that maybe a shorter path might be to acquire a business to get access to a talent pool,” Casey says. “In addition to having a job market that’s getting tighter, we also have a skills gap.”
Of the U.S. executives in the EY survey, 58 percent say that acquiring talent is the top strategic driver for acquisitions. Another recent survey—by SunTrust Banks Inc. (NYSE: STI) of small- and middle-market businesses-- also found that acquiring skilled talent is a major driver for M&A.
Divestments are also a fundamental part of capital allocation strategies, according to the survey's U.S. respondents, with 66 percent of them reporting that “portfolio transformation,” including divestments, of assets, will dominate company board discussions. Nearly one-third of executives surveyed have increased the frequency of portfolio reviews in the past three years, and this is driven by digital transformation, the report states. Opportunities offered by new technology and the threat of competition from “digitally savvy competitors and startups” are driving transformation plans and positioning against disruption, according to EY.
An improving economy, freely available credit and record corporate earnings are enabling executives to make tough divestment decisions, and quickly. Of the surveyed executives globally, 74 percent expect to achieve their post-portfolio-review objectives within 12 months, with 39 percent identifying an asset at risk of disruption to divest and 32 percent identifying an underperforming asset to divest.