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Global M&A appetite at 10-year high fueled by portfolio reshaping

17 June 2019
EY Japan
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  • 53% of Japanese companies plan deals in the next year fueled by portfolio reshaping
  • Strong M&A intentions accelerated rather than stalled by uncertainty
  • Despite Brexit uncertainty, UK is top investment destination for the first time in 10 years

Despite mounting geopolitical complexities, the appetite for global mergers and acquisitions (M&A) is at a 10-year high, according to the 20th edition of the EY Global Capital Confidence Barometer (CCB), a biannual survey of more than 2,900 senior executives across 47 countries. Companies continue to use acquisitions to build the foundations for future growth amid rising uncertainty. Almost six in ten (59%) global companies and 53% of Japanese companies are now planning to acquire in the coming year -- up from 52%(Global), and 50% (Japan)12 months ago.

Executives also expect their peers to be active at the deal table, with 94% of respondents from Japanese companies predicting the global M&A market to improve in the next year compared with 87% in April 2018.

M&A intentions are underpinned by broader corporate confidence. In stark contrast to many economists forecasting slower growth and despite geopolitical uncertainty, global executives are more optimistic about macroeconomic prospects. The vast majority of respondents (93%) believe the global economy is improving - almost a 20 point uptick in positive outlook compared with 72% a year ago. This bullish view among executives is reflected in the optimistic assessments of their own future performance: 73% of respondents expect revenue growth of between 6% and 15% in the next year.

Vincent Smith, Representative Director, Chairman - EY Japan Transaction Advisory Services, says:"The increase in acquisition appetite is a clear indication that executives are focused on their pursuit of growth, underpinned by high expectations of their own future performance. There is uncertainty in the market, but for many - disruption is driving M&A rather than stalling it - deals are a means to reshape portfolios at an accelerated pace and futureproof businesses."

Executives while focused on deals and growth, have not lost sight of risks. A third (33%) see a potential economic slowdown as the primary concern, although they do not expect it. A similar number (24%) believe geopolitical, regulatory and trade uncertainties are the greatest external risks to their growth.

Reshaping portfolios to reinvent the future

Companies worldwide are increasingly concentrating on proactively seizing disruption's upside opportunities and managing risks, according to the latest findings. As the speed of disruption and innovation accelerate, so does the frequency of portfolio reviews.

63% of Japanese companies are reviewing their portfolios every three months. Frequent portfolio reviews allow companies to better identify areas for investments and acquisitions at speed, to recognize assets to divest and to improve capital allocation strategies.

Shareholder activist pressure is also prompting more frequent portfolio assessments. Activist pressure to reshape portfolios is geared towards reconfiguring operations or geographic footprint (17% of respondents) and to divesting (34%). It is also leading to pressures for an acquisition for almost a half of respondents (49%).

Smith says: "Companies are proactively realigning portfolios by buying and selling to futureproof growth. In a digitally enabled hyper-speed world, innovation often means turning your biggest risk into an opportunity."

Frequent portfolio reviews drive capital recycling to invest in growth areas

29% of Japanese respondents identified an underperforming asset to divest or identified an asset at risk of disruption to divest as a result of their most recent portfolio review.

"We are observing significant landscape shift in how Japanese multinational corporates, including Trading House conglomerates, reshape their business portfolio. Strategic portfolio management and portfolio reshaping by the large Japanese corporates is resulting in an increase in de-conglomeratizations leading to carve outs, spin offs and public to private deals especially for publicly listed subsidiaries of large Japanese conglomerates. Global Private Equity Funds with their large scale available funding and liquidity are putting to use their available funds in such Japanese carve outs and de-conglomeratization deals. This Japanese Corporate landscape shift is creating value for stakeholders in the way not seen before." states Koichi KT Tamura, Senior Partner and Head of Japan Markets, EY Japan Transaction Advisory Services.

UK climbs to top investment destination and China looks to US

Despite continued uncertainty stemming from its intention to leave the European Union (EU), the UK climbs to number one spot in the top investment destinations for the first time in the survey's 10-year history - up from its lowest 7th position in October 2016 and displacing the United States (US) which held the top spot since 2014. The UK is followed by the United States, Germany, China, France, Canada, India, Australia, Brazil and the United Arab Emirates.

While the UK's position may surprise some given current uncertainty, M&A activity during the period since the 2016 EU Referendum has remained strong. In 2018, the country accounted for 10% of M&A globally worth a combined US$400b - its second-best year since the financial crisis - with domestic mergers boosted by strong inbound and outbound flows.

Another surprising finding sees China climb back into the top five investment destinations, even as concerns about market access and reciprocity with the US and the EU continue. And despite issues over protectionism, the US is a top destination of choice for nine of the ten most active cross-border investors, including China.

Overall, the top five investment destinations for Japanese executives surveyed are Japan, the US, China, the UK and France.

Smith says: "Geopolitical issues create significant challenges, but executives are determined to overcome perceived barriers and secure - or expand - their presence in markets that support their long-term strategic goals. While nationalism may fuel much political debate, technology has made the world a smaller place and executives remain international in their search for growth."

All roads lead to deals

Corporate executives expect their deal strategies to face significant competition - 86% expect an increase in hostile and competitive bidding in the next year. At the same time, 91% expect more competition for assets from private equity and 85% foresee more megadeals (US$10b and above). Smith says: "Our first EY Global Capital Confidence Barometer launched 10 years ago in the wake of the global financial crisis reflected great unease across markets. One major difference between now and then is how the C-suite views uncertainty. In 2009, boardrooms were paralyzed by uncertainty. Today they are motivated by uncertainty. The boardroom of 2019 is concentrating on proactively managing risks and seizing the upside opportunities of disruption."

View the survey online at ey.com/ccb and follow us on Twitter: @EY_TAS | #EYCCB

〈About EY〉
EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In doing so, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.
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〈About EY Transaction Advisory Services〉
How you manage your capital agenda today will define your competitive position tomorrow. We work with clients to create social and economic value by helping them make better, more-informed decisions about strategically managing capital and transactions in fast-changing markets. Whether you're preserving, optimizing, raising or investing capital, EY's Transaction Advisory Services combine a set of skills, insight and experience to deliver focused advice. We can help you drive competitive advantage and increased returns through improved decisions across all aspects of your capital agenda.

About EY Global Capital Confidence Barometer
EY Global Capital Confidence Barometer is a biannual survey compiled by Euromoney Institutional Investor Thought Leadership of more than 2,600 senior executives from large companies around the world and across industry sectors. This is the 19th biannual CCB in the series, which began in November 2009; respondents for the 19th edition were surveyed in August and September 2018. Respondents represented 14 sectors, including financial services, consumer products and retail, technology, life sciences, automotive and transportation, oil and gas, power and utilities, mining and metals, diversified industrial products, and construction and real estate. The objective of the Global Capital Confidence Barometer is to gauge corporate confidence in the global and domestic economic outlook, to understand boardroom priorities in the next 12 months and to identify emerging capital practices that will distinguish those companies building competitive advantage as the global economy continues to evolve. ey.com/ccb #EYCCB


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