Digital disruption drives deals – EY

BY Richard Summerfield

The digital revolution of the last few years has had a significant impact on almost all facets of our daily life. Smart phones, cloud computing and Big Data have integrated into our daily routines almost seamlessly, and it is for that reason that the digital transformation of businesses has become such a valuable development.

This emerging reliance of mobile, cloud and Big Data technology is significant for many reasons, not least of which is the manner in which it is helping to drive mergers and acquisitions in the technology space. According to a new report from EY, 'Capital Confidence Barometer – Technology', companies are turning to cloud and mobile technology as they look to remain relevant in an increasingly competitive and demanding industry. EY’s data suggests that to the end of October the value of tech related M&A deals was $396.4bn; as such, the record of $412.4bn worth of tech deals announced in 2000 is likely to have been exceeded by the end of the year.

The impressive pace of M&A driven deals is also unlikely to slow going forward, according to EY. Forty-five percent of the technology executives surveyed for the report noted that they intend to pursue deals in 2016; this number is higher than in the last three surveys carried out by EY in the third quarter of the year.

Thirty-four percent of respondents will look outside of their own sector. Thirty-seven percent believe that ‘digital future’ – EY’s term to describe the disruption of all areas of enterprise caused by technology – is the most important driver in M&A deals today.

Jeff Liu, Global Technology Industry Leader, Transaction Advisory Services at EY, said, "As the overall M&A market hits its stride, the technology sector has continued to shatter M&A records from one quarter to the next. While digital disruption is not a new story, we have clearly entered a new chapter in its impact on M&A. It is one in which the customer is becoming a more digitally empowered protagonist. Changing customer behaviour is driving technology company acquisitions of non-technology companies — and vice versa."

Given the increasing confidence in the global economy, tech companies are feeling bullish about completing further deals in the year ahead. Though many tech executives are concerned about lingering geopolitical difficulties and their effect on the wider global economy, they will not be put off pursuing deals. With companies willing to commit 60 percent of their available capital to growth in 2016, the deals will keep coming.

Report: Capital Confidence Barometer — Technology

Austerity-extending 2016 budget approved by Greek parliament

BY Fraser Tennant

Austerity measures in the billions is the harsh outlook for Greece in 2016 following its parliament’s approval of a budget steeped in spending cuts, pension reforms, tax rises and a less than favourable GDP growth forecast.

The austerity measures, narrowly approved in the Greek parliament by a margin of eight (153 votes to 145), offer up a stringent €5.7bn in spending cuts, encompassing €1.8bn being seized from pensions and €500m from defence. Additionally, the 2016 budget contains tax increases of around €2bn.

Yet despite these measures, Greek debt is still forecast to grow to €327.6bn in 2016.

Furthermore, in terms of gross domestic product (GDP), the government’s budget plan states an expectation of zero GDP growth in 2015 (compared to the 2.3 percent contraction earlier forecast) and the projection of a 0.7 percent drop in GDP (compared to a 1.3 percent contraction prediction). 

“Almost all opposition parties are absorbed with internal issues so the vote process was easy for the government”, observes Dimitris Rapidis, a political analyst and director of the think-tank, Bridging Europe. “The New Democracy party has an upcoming leadership race, the socialists and the communists are out of space, the River party had nothing to offer to the debate, whereas Centrists Union and Golden Dawn are becoming increasingly populist."

Well aware of his government’s need to make good on previous anti-austerity pledges (as well as satisfying the demands of international lenders), prime minister Alexis Tsipras called the 2016 budget, the first to be put before the Greek parliament by the Syriza-led government, “a difficult task for a government that wants to leave its mark with social justice".

Also featuring in the 2016 budget is detail on the three-year €86bn rescue package, in return for which Athens is requested to pass at least 60 'prior action' bills through parliament (including tax hikes and pension reforms), the government’s privatisation of €50bn of national assets to help pay off its debts, and €25bn in new capital that is required to keep the banking system afloat.

A further budget revelation is the admission that Greece is scheduled to be paying off its creditors for the next 42 years, at least.

Looking back, 2015 has been a turbulent year for Greece, with the Syriza government winning national elections in January and September; a much-derided €86bn EU bailout in July; and the country becoming the first ever developed nation to default on the International Monetary Fund (IMF) in June - and all this against a backdrop of a battered economy, immense pressure from international creditors and the continuing spectre of a ‘Grexit.’

On a more positive note, representatives of the eurozone, the European Central Bank and the International Monetary Fund are in Greece this week to continue talks on the pending reforms of the pension and tax systems, as well as public administration issues.

News: Greek parliament approves austere budget for 2016

UK regulators get “tougher” on financial wrongdoers

BY Fraser Tennant

UK regulators are “getting tougher on financial crime” by issuing increasingly stringent penalties to wrongdoers, according to new analysis published this week by EY.

EY’s Investigations Index reveals that, over the past two years, the punishments handed out by the UK’s regulatory bodies – the Financial Conduct Authority (FCA), the Serious Fraud Office (SFO), the Competitions and Markets Authority (CMA) and the Office of Fair Trading (OFT) – saw fines soar by 271 percent (with £2.45bn issued in the past two years) and prison sentences increase 124 percent. Company directors also face an average prison sentence of four years or more.

Additional findings in the EY study include: (i) 58 percent of cases investigated by the SFO resulted in prison sentences; (ii) 56 percent of cases investigated  by the FCA resulted in fines; (iii) of the 82 cases investigated by the FCA over the course of two years, 25 were against individuals; (iv) of those 25 cases, 36 percent resulted in prison sentences; (v) 10 percent of all cases dealt with individuals or firms committing fraud; and (vi) of the 125 cases investigated by the CMA and OFT in the past two years, 119 were due to a proposed or completed merger or acquisition.

“UK regulators are getting tougher on financial crime," said John Smart, head of EY’s UK Fraud Investigation & Dispute Services team. “In the wake of recent corporate scandals and growing political pressure, there seems to be a greater focus by the regulators to pursue cases that may once have been considered ‘too difficult’, to ensure those responsible for wrongdoing are held to account.”

Despite the tougher stance, the Index did find that the average prison sentence has decreased by 40 percent over the past two years, from 87 months to 52 months.

Nevertheless, Mr Smart believes that the Index findings should also serve as a warning to companies, to review their processes on a regular basis, stating that the top reasons for fines, namely systems failings, business misconduct and misleading information, were all factors that could have been avoided by having stronger control processes to identify and resolve any corporate blind spots.

The EY Index examined 231 cases (which took place between 1 October 2013 and 30 September 2015) involving fines and criminal prosecutions against business and individuals.

News: U.K. Regulatory Fines Soar Amid Crackdown on Financial Crime

Beers still on ice as regulatory hearings loom

BY Richard Summerfield

The $106bn mega merger between beer rivals Anheuser-Busch InBev and SABMiller is approaching a key crossroads as regulatory concerns on both sides of the Atlantic are addressed.

In light of antitrust issues in Europe, it is believed that Anheuser-Busch InBev will sell the Peroni and Grolsch brands it will gain from its merger with SABMiller. Indeed, AB InBev will likely divest of several SABMiller brands as the majority of the company’s products are European-focused. The combined company’s dominance of the European market would undoubtedly be a red flag for European regulators.

The loss of two of SABMiller’s four global brands will have a significant impact on the company in terms of both volume and profitability. Yet reducing the lucrative European portfolio is a necessary evil if AB InBev is to win merger approval. Dutch group Heineken, US based Molson Coors and Irish firm C & C Group have all been mooted as potential acquirers of the Peroni and Grolsch brands, expected to sell for billions of dollars.

Away from Europe, the merger has already acted as the catalyst for a number of divestitures. To appease antitrust concerns in the North American market, SABMiller will sell its 50 percent voting interest and 58 percent economic interest in MillerCoors to Molson Coors, its partner in the joint venture, for around $12bn. The Miller brand is one of the most important, and highest selling beer franchises globally.

Next week the merger between the two firms will be subject to a US Senate hearing according to the Senate Judiciary Committee.

Outside of Europe and the US, regulatory concerns around the deal remain. Chinese regulators in particular are expected to create further difficulties down the road.

News: Anheuser-Busch InBev to sell Peroni, Grolsch to smooth merger - FT

Property price growth rate drops - report

BY Richard Summerfield

Property price growth rates have slowed in many of the world’s major city markets, according a new report from Knight Frank and EY.

In recent years, affordability has become a problem, limiting price growth. The report, entitled 'Global Tax Report 2015', examines holding and selling costs for overseas buyers of prime residential property between 2010 and 2015. According to the data, the slower rate of price growth in most major markets has made transaction costs and taxation increasingly important factors for investors.

“When purchasing property as an investment, tax is not necessarily the first concern but it is important because it is often the after-tax return that measures the success of the investment," said Carolyn Steppler, private client tax services partner at EY, UK & Ireland. "Our research shows that the tax burden across the cities in this report varies considerably both in amount and extent,” she added.

The joint report examines non-tax purchase, management and sale costs across 15 leading global cities, highlighting considerable variations. For example, international investors hoping to acquire property overseas can get the lowest costs in Shanghai. Monaco offers the lowest level of taxation when purchasing property valued between $1m and $10m.

The cost of UK tax equates to around 9.7 percent and 20.7 percent for $1m and $10m properties respectively. Taxation governing residential property in the UK and London specifically has changed considerably over the last two years. In December 2014, progressive stamp duty land tax rates were introduced, and in April 2015 the taxation of capital gains on the disposal of property by non-resident owners was also introduced. Potential alterations to inheritance tax in the UK could also impact activity as certain property investment structures will become much less attractive to investors. However, London’s position as an economic and cultural powerhouse will help maintain the city's lustre for international investors.

Cities where property costs are highest include Paris, Berlin and Geneva, with costs for a $10m property can exceed 10 percent.

Report: Global Tax Report 2015