Brian BollenThe outlook for international mergers and acquisitions activity is strong for reasons ranging from economic growth to strategic Chinese internationalisation, according to the global accountancy and related services firm EY (formerly known as Ernst & Young).
The firm's recently published Global Capital Confidence Barometer shows that more than 40% of value was allocated to buying assets abroad in the first quarter of 2017.
Search for growth a green light
The survey strongly suggests that a buoyant M&A market can co-exist with heightened geopolitical uncertainty, observes Steve Krouskos, EY global vice chairman, transaction advisory services.
While technology and digital disruption are major drivers of the current market, other considerations are also spurring deal activity, he continues. Geographical expansion to secure supply chains and increase customer reach will accelerate cross-border M&A.
Private equity is returning to replenishing mode. Corporates are increasingly reassessing and reshaping their portfolios. This is creating a classic virtuous circle which delivers a natural pipeline of deal opportunities.
“Consequently, the M&A market is healthy,” says Steve Krouskos, and we can expect further deal activity. “The search for growth is a green light for dealmakers.”
Emerging M&A themes
- Potential policy changes affecting market access
- Executive ambition
- Accelerating growth
- High profile activist and institutional investors
- Rising private equity interest
United States of dealmaking
The United States retains its position as the centre of global M&A, says EY.
Should tax reform come to pass later this year, repatriation of US companies’ record cash holdings should give a major boost to US dealmaking.
Coupled with strong credit availability and a strengthening dollar, this could boost the financial firepower of US companies as they look beyond their borders to buy into pockets of overseas growth or new technologies.
US top sectors
- Diversified industrial products
- Real estate, hospitality and construction
- Automotive and transportations
China surge
Oubound Chinese M&A activity surged in 2016 and China is now well established as the second most important market of global M&A. Figures from Thomson Reuters show that Chinese companies made a total of 912 acquisitions outside the country, worth a total of US$222bn.
This is more than double the equivalent amount in 2015 ($107bn from 625 transactions).
China has been notoriously insular for much of its glorious history but companies are now being given freedom to invest elsewhere. There is a huge appetite to acquire assets internationally.
The Chinese government wants the country to play a bigger role in the international markets. To have a loud voice, as Toby Tao, a director in Deloitte's corporate finance team and head of China/Europe M&A, puts it.
Successful acquisitions are one of the quickest ways to do that. Prominent on the target list are companies in the following sectors as categorised by ThomsonReuters: materials, high technology, energy and power, industrials, media and entertainment, financials, real estate, consumer staples, healthcare and telecommunications.
Fundamentals driving M&A activity globally
- 69% of survey respondents cite a broad range of geopolitical or emerging policy concerns as greatest risks to their business
- 73% have increased the frequency of the portfolio review process
- 64% see the global economy improving
- 56% intend to acquire in the next year
China changing and internationalising
China is changing and internationalising as it transitions from an export-oriented towards a more consumer-oriented economy, says Toby Tao. Moreover, the supply of cheap labour is declining.
This is partly due to a range of factors. A principal cause is demographics, especially the ageing of the population and the long-term impact of the one child per family policy; this was abolished only in 2016.
But elements of the China story are changing again in front of our eyes. While the focus of 2016 was outbound acquisitions, 2017 will be firmly centered on domestic combinations and inward investments.