Cash, confidence and consolidation to fuel M&A recovery
Record levels of cash on balance sheets and increasing boardroom confidence will fuel M&A growth, according to a report from law firm Hogan Lovells.
Hogan Lovell’s latest Evolution Report examines the conditions required to reignite the global economy, through a survey of 240 board level members at leading global companies. The report shows cautious optimism, coupled with decreasing concern about market weakness and volatility, which could be the catalyst for long-awaited growth.
Global corporates are now holding record levels of cash on their balance sheets, at USD5.6trn, almost double what they held a decade ago. Combined with a global equity market rally year on year, on all major indices; a high water mark in debt issuance, with September 2013 a record month for investment grade debt, market conditions are now ripe for M&A resurgence with M&A deals by value have consistently risen in each quarter of 2013 (Q3 up 22.7 per cent on Q2 and 26.9 per cent higher than Q1).
Despite this window of opportunity, boards remain concerned about the regulatory landscape and its potential to disrupt growth; six in 10 board executives see regulation as the biggest concern over the next two years, with over half expecting it to be at the top of their agenda in the longer term (three to five years). When looking at international expansion, this concern is even stronger, with nine in 10 citing regulatory hurdles as the biggest challenge companies face when dealing with cross-border expansion.
Board members expect consolidation to be the main driver behind M&A investment (69 per cent), whilst 63 per cent of respondents expect to use M&A as a means to increase market share in existing markets. Nonetheless, appetite for distressed M&A, and expansion into foreign markets is expected to spur activity with over half of respondents identifying this as an ambition in the short term, signifying a potential step change in M&A transactions in the year ahead.
Andrew Pearson, London head of corporate finance at Hogan Lovells, says: "Our report highlights that many of the ingredients are in place for M&A activity to pick up, but there are still significant challenges for most corporates. We are in a transitional period, where the approach from boardrooms is one of ambition mixed with caution and the case for M&A as a route to growth will have to be more compelling than ever.
“Corporates are facing a changeable landscape as debt is likely to become more expensive with the tapering of quantitative easing in the US, while the regulatory environment remains challenging. Corporates remain pessimistic about the growing regulatory strain they face and see little prospect of improvement in the longer term. For a real take-off in M&A there is a clear demand for a more measured and consistent approach from regulators across the globe.”
From a financing perspective, the report also shows that cash remains king. Three in four respondents (75 per cent) stated cash will remain the main source of funding transactions over the next five years.
Talent is the top priority for success, with 67 per cent of global corporates ranking it as the most important priority for success, and three in four in Europe.
Respondents are still hesitant regarding economic recovery, so businesses will need to find ways to enhance sales and increase market share by outperforming competitors and driving innovation within their business – 45 per cent believe innovation will be the greatest challenge to their industry in the next two years, with over half (56 per cent) citing product service and innovation as the most significant change in their industry since the financial crisis.