BY Richard Summerfield
As fears of an escalating US-China trade war and uncertainty over Brexit abound, globally, companies’ appetite for M&A has fallen to a four-year low, according to EY’s biannual ‘Global Capital Confidence Barometer’ report.
Forty-six percent of global executives say that they plan to buy other firms in the next 12 months, a 10 percent decline from the previous year, according to EY. A further 46 percent of respondents to a survey of more than 2600 executives across 45 countries also said they saw regulation and geopolitical uncertainty as the biggest risk to dealmaking activity over the next year.
“Geopolitical, trade and tariff uncertainties have finally caused some dealmakers to hit the pause button,” said Steve Krouskos, EY Global Vice Chair, Transaction Advisory Services. “Despite stronger-than-anticipated first-half earnings and the undeniable strategic imperative for deals, we can expect this year to finish with much weaker M&A than how it started. The good news is that companies will likely take the break in action as an opportunity to focus on integrating the many deals undertaken over the past 12 months. This is likely to be just a pause, not a complete stop. Fundamentals and the strategic rationale for deals remain strong, and the appetite to acquire will likely grow toward the second half of 2019.”
The escalation of tension between the US and China has already led to an increase in tariffs, Brexit too could drive a tariff increase, though the outcome of the Brexit negotiations is still unknown, despite the close proximity of the UK’s March 2019 exit date. The outcome of the Brexit negotiations is causing some consternation and is a key focus for those executives surveyed. Forty-one percent of respondents would prefer the UK to enter an Economic Free Trade Agreement similar to Switzerland, while 22 percent would prefer a Free-Trade Agreement model similar to that between the EU and Canada. Five percent of executives globally prefer a second referendum of the UK’s EU membership, and 6 percent would prefer a World Trade Organisation rules-based outcome.
Despite the increased uncertainty and decline in global dealmaking appetites, confidence in the M&A market remains high. Ninety percent of respondents expect the market to improve over the next 12 months. For some companies, the coming year will enable them to focus on integrating the deals they have completed over the last few years.
Indeed, some companies intend to use M&A to overcome the ongoing global instability. Twenty percent of executives noted that they are focusing more on international opportunities, including within the UK, which is the number two M&A destination of choice for executives globally, up from fifth position in the April 2018 survey.