TOKYO, May 26, 2017 - Global mergers and acquisitions (M&A) activity continues to gain strength following heightened dealmaking in the first quarter of 2017, according to the EY 16th Global Capital Confidence Barometer (CCB). Ongoing geopolitical uncertainty has not dented deal appetite among executives.
Based on a survey of more than 2,300 executives across Japan and 42 other countries, the Barometer finds that even amid rapidly changing market conditions, 37% of Japanese companies expect to actively pursue deals in the next 12 months - up two percentage points from a year ago.
At a time of already elevated dealmaking, 58% of Japanese companies expect their deal pipelines to expand further in the next year. This is up 23 percentage points from just 6 months ago. The vast majority (98%) of Japanese executives expect the M&A market to improve or remain stable over the same period.
According to the Barometer, this strong appetite for deals perseveres against a backdrop of geopolitical or emerging policy concerns, which are seen as the greatest risk to economic growth for 69% of businesses. Yet based on the findings of the survey, the disruptive impact of technology on potential deal outcomes and business models remains at the forefront of the minds of the majority of executives.
Vincent Smith, Representative Director, Chairman - EY Japan Transaction Advisory Services, says:
"Geopolitical and policy uncertainty is a permanent feature of the boardroom, but technology-enabled disruption poses a greater challenge to many business models. The exponential pace of disruption and transformation is compelling executives to engage in M&A. Companies need to innovate to follow rapidly changing customer preferences and buying assets can be the fastest way to radically reshape their business for future growth."
Resurgent economic confidence and potential rewards of M&A eclipse broader risks
Uncertainty about policy changes and the potential of increasing intervention by governments - through new rules and regulations - are on the list of concerns for executives. According to the Barometer, dealmaking is supported by positive corporate indicators and a strong resurgence of Japanese economic confidence - 67% of Japanese executives see the state of the global economy as improving (up from 43% in October 2016). Notably, 69% of Japanese executives see the state of the local Japanese economy as improving (up from 25% in October 2016).
Smith says: "Signs of a global economic upturn are boosting renewed expectations for growth, but it is the improving confidence in the Japanese domestic economy that will really underpin growth and further fuel deal intentions. At the same time, investor expectations have also increased. The net result is executives recognize that staying on the deal sidelines could mean they are sidelined from securing future-proofing assets."
Investing globally in a time of rising nationalism
Japanese fears of increasing protectionism in 2016 still exist and have morphed into uncertainty about policy that could impact global trade. However, despite trade barrier speculation, cross-border M&A has already been a hallmark of dealmaking in 2017, with a resurgence of deals between the United States (U.S.) and Western Europe. Further, Japanese executives remain more positive than their global peers that the political situations in the US and United Kingdom (UK) will create more M&A opportunities. For Japanese companies expecting to do acquisitions, there is growing confidence in the quality and likelihood of closing acquisitions domestically in the next 12 months, whilst the search for growth will nonetheless continue overseas. Companies are looking everywhere for pockets of growth, although the main focus has shifted back to developed markets, the CCB finds.
In a possible reaction to increased deal opportunities arising from political situations in the US, UK and Europe, Japan has fallen to the tenth most attractive global deal destination, dropping 4 places from sixth position in October 2016. The U.S. (1st), China (2nd), UK (3rd), Germany (4th) and Canada (5th) comprise the top five most attractive global deal destinations. However for Japanese companies, the top 5 most attractive deal destinations are Japan (1st), China (2nd), US (3rd), India (4th), and Italy (5th). .
Other results from the survey point to growth intentions not being curtailed by geopolitical issues. Almost 70% of Japanese companies say the Brexit decision has increased or had no impact on their UK investment intentions. In the U.S. there are signs that the new administration will foster further M&A - 68% believe potential policies will either increase or have no impact on deal activity.
"For many companies, cross-border deals are a necessity -- successful companies will find ways to navigate challenges such as rising nationalism," says Smith. "Executives are evaluating M&A across a wide range of geographies to secure market access and grow customer base."
Portfolio optimization comes to the fore amid rapidly changing market
Amid rapid change, companies are building more agility into their strategies, with 69% increasing portfolio review processes to respond to or capitalize on disruptive forces in their sectors. Technology-fueled industry convergence and transformational customer changes are challenging executives to continually reassess and reinvent their businesses.
"Executives are also being proactive in reassessing and reorganizing their geographic footprint to be able to quickly pivot in response to any major trade policy changes," says Smith. "They are looking at options given the recent political developments and may need to be able to shift operations quickly to protect globalized operations and supply chains."
These considerations are translating into deal activity across all sectors in Japan. The top six acquisitive industries are telecommunications, media and entertainment, automotive, diversified and industrial products, life sciences, and technology.
Disruption drives deals
Buying innovation will be part of the dealmaking fabric in 2017 the Barometer finds. Disruptive startups challenge existing business models - more established companies will look to accelerate growth by acquiring innovative start-ups. These buyers will employ a range of acquisition techniques - from full asset purchases to investments via corporate venture capital arms.
Smith says: "For many executives today, the only constraints are the ones they create. They are imagining a future and are using buying and selling strategies to help realize this vision. Companies are playing on their own terms and utilizing more regular and rigorous portfolio reviews to be strategically nimble and opportunistic. Executives are not being distracted by policy speculation that may or may not have an impact in two years when they need to stay focused on the tech start-up that could disrupt their business in two months. M&A is both a protection against that disruption and an opportunity to disrupt the competition."
Brand, Marketing and Communications (BMC)