A majority of corporate executives believe the M&A environment will improve or remain stable over the next 12 months but a closer look at various factors points that simply acquiring assets is not enough. A report published by EY states that 90% of executives believe the M&A market will improve while 80% expect growth in corporate earnings.
However, most of them do not intend to pursue deals themselves and prefer to focus on the integration of existing deals. Only 46% of executives expect to make an acquisition in the coming year with the same number singling out policy uncertainty as the biggest barrier to dealmaking. Close to 50% intend to start integration planning early.
A majority of executives have confidence that global economic growth will remain strong in the next 12 months. The US is seeing a pickup in economic activity fuelled mainly by the tax reform while in countries like the UK and Japan, economic growth has slowed down.
Brexit is a key issue in the UK for the economy in general and for dealmaking. The overall sentiment in the UK about the impact of Brexit on businesses appears to be positive but it also shows that companies have been planning and preparing for every possible outcome.
While trade and tariff issues have been cited as a main concern for companies, the report points out that the changes brought on by technology that lead to shifts in customer behavior pose a significant risk to businesses in the near term.
Other major impediments to dealmaking in the near term are government interventions and policy changes. Changes in trade and tariff policies need to better understood as such uncertainties tend to increase risks. In order to be better prepared for sudden changes from technology disruptions and trade policy changes, companies are constantly reviewing their portfolios.
Companies that balance both divestitures and acquisitions tend to outperform those who focus on one strategy alone
As investors demand healthy margins, a majority of businesses continue to review their portfolios and such reviews focus on divestiture opportunities. The report indicates that companies that balance both divestitures and acquisitions tend to outperform those who focus on one strategy alone.
These portfolio reviews and the resulting divestitures could lead to new assets coming to the market over the next two years and a lot of these assets could be bought by private equity. There could also be an increase in cross-sector deals over the coming year. Such transactions require early planning and a good understanding of the regulatory conditions involved.
Instead of looking for new targets, many companies are focusing on integrating their existing deals. The report points out that in order to effectively capture synergies, these need to be clearly identified at an early stage and then constantly monitored for progress. It stated that businesses which spent more on integration outperformed their pre-deal targets.
Businesses have developed their models and operations keeping a globalized environment in mind and the changes in policies are leading them to test their strategies in order to be prepared for any possible outcome. The report points out that due to tightness in labor markets, retraining and rewarding existing employees is necessary for businesses to maintain strength.
In spite of all the geopolitical uncertainties, companies still look at mergers and acquisitions as an effective strategy for expansion into new markets and regions. Another factor driving acquisitions is the need to acquire the necessary resources to deal with shifts in customer preferences. The report also indicates that cross-border deals are gaining demand as companies attempt to deal with trade barriers and policy changes.
In conclusion, several factors influence the health of a business and a simple acquisition strategy might not be enough to boost growth. Companies will have to take a closer look at which assets are worth holding on to and where to cut the flab.