1  February 2012 - With ongoing turmoil in the Eurozone at best slowing economic growth and at worst threatening to return key markets to recession, many commentators are predicting a 2012 fall in M&A. “There is no denying activity will be highly influenced by macro-economic factors, but there are fundamental reasons why M&A might be more robust than many expect,” says Pip McCrostie, Ernst & Young’s Global Vice Chair of Transaction Advisory Services.

12 for 2012:

• Confidence in the face of considerable challenge

Confidence in the global economy is surprisingly robust – two thirds of large cap corporate executives globally consider the global economy at least stable1. Confidence is particularly robust in sectors such as power and utilities, oil and gas and metals and mining.

• New year, same old appetite for deals

M&A value worldwide was up by 7% in 20112 and that would likely have been higher had the US credit downgrade and unfolding Eurozone crisis in the second half of the year not led to a 24% decline compared to the first six months3. Despite that, 41% of large cap corporates globally plan an acquisition this year4.

• War chests are available

While a credit squeeze is a serious prospect for many businesses as a consequence of events in Europe, there is continuing access to credit for investment grade large cap corporates globally5, but many companies might not actually need it – they have huge cash war chests on which to draw. Globally companies are now sitting on more than US$2.3trillion in cash6 – that is close to the value of all M&A globally in 2011.7

• Profiting from the 2009 detox resolution

There has been a greater focus on operational fitness in the past three years. Companies have strengthened their balance sheets, cut costs and reduced overall financial risk. Large cap corporates have improved their capital structure by extending maturities and reducing interest costs. Overall debt has fallen, with 61% having debt-to-capital ratios of less than 25%8.

• Sectors ripe for consolidation

Gaining market leadership will be a particular driver of deals in specific sectors. M&A value in healthcare rose in 20119 as did tech10 activity, with deals such as Microsoft-Skype hitting the headlines. In 2012, the continuing convergence of mobile, wireless and cloud technologies will create an increasing appetite to secure innovative intellectual property and valuable patents.

• Private equity could return

Private Equity M&A increased in value by a third in 2011 to US$306bn and saw a strong fourth quarter despite the economic turbulence generated by the Eurozone crisis11.Those sectors such as healthcare, technology and oil and gas that have remained active among the turbulence could be particularly attractive for PE in 2012.

• Picking up a bargain in the new year sales?

There is a growing convergence around the price of assets. More than 80% of large cap corporates globally see valuations either remaining at or around current levels for most of 201212.

• More companies sold on the idea of divesting

In 2012, 26% of large cap corporates globally plan to divest13, bringing more sellers to the table. In 2011 – the US saw divestments increase both in terms of volume and value14.  “We would expect to see more disposals and spin-offs in Europe from governments, banks and corporates in 2012, as that trend moves East,” says McCrostie. “Sovereign debt issues will likely lead to privatizations and the sale of public assets to raise liquidity, while banks are likely to sell assets to increase the capital ratio on their balance sheets,” she continues.

• Re-positioning through restructuring

It’s likely that financial and operational restructuring will be on the increase again in 2012 – providing a source of quality assets for those in the market to acquire. Banks will come under particular pressure to restructure their portfolios due to regulatory change and increased capital requirements.

• New Year's resolution: buy to secure market leadership?

Almost two thirds of large corporates globally say the primary purpose for making acquisitions is to gain market share in new and existing markets or to acquire new products or consolidate their existing product base.15 In the current market conditions, M&A is seen by some as a cheaper option to gain market share than to invest organically.

• East meets West... and vice versa

The most attractive markets for investment in 2012 for large cap corporates are China, India, Brazil, the US and Australia.16 Outside recognized BRIC countries, Malaysia, Mexico and Argentina are the most popular emerging market destinations.17 India aside, domestic BRIC M&A activity continues to increase as does its overseas investment with Brazil, Russia and China increasing outbound deal volume during 2011.18 That is likely to increase in 2012, for example, the Eurozone crisis is causing cash-rich economies such as China to re-focus their investment strategy from government and market debt securities to tangible assets such as infrastructure and natural resources.

• A good omen – east meets west again

For those with a superstitious nature, the previous three times a US presidential election has taken place during the Chinese year of the Dragon – a symbol of confidence and fearlessness – there has been a rise in both M&A deal volume and value19, as well as a rise in global GDP.20 Says Mrs. McCrostie: “Could this esoteric factor signal another rise in M&A activity in 2012? Given the acute market volatility and grim news in the second half of 2011, I’m sure we would all welcome this as a light-hearted and positive omen for 2012.”

Vladyslav Ostapenko, Head of Mergers and Acquisitions, Ernst & Young in Ukraine

"We hope that for Ukraine this year will be at least the same in terms of volume of transactions. Not all the factors mentioned in the global outlook work for Ukraine, but it is worth noting that really interesting situation has developed in the country in terms of opportunities for consolidation in many industries. The activity of foreign investors is now largely focused on emerging markets, including Ukraine, and, providing that no global shocks occur, the M&A market volumes may well be at the level of the previous year".

- Ends -

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