Nothing excites the business world like an M&A deal. Think of the fuss caused by the $30bn race to takeover of Sky by Comcast. And according to advisory firm EY, executives are so heady with M&A fever that the global “appetite” for deals is at its highest level for a decade.
EY released a report this week saying a survey of 2,900 executives across the world had revealed that 59% of their companies are planning to acquire another business in the next 12 months, up from the 52% last year. More than 90% believe the M&A market will improve this year.
That’s a lot of potential buying and selling of companies. What’s perhaps more interesting is the explanation. EY says that the thinking inside boardrooms is that “disruption” and “uncertainty” in the market will provide opportunities. Moreover, it means executives have to review their portfolios of companies to ensure they “future-proof” their businesses.
According to Steve Krouskos, EY’s global vice chair, transaction advisory services: “The increase in acquisition appetite is a clear indication that executives are focused on their pursuit of growth, underpinned by high expectations of their own future performance.
“There is uncertainty in the market, but for many disruption is driving M&A rather than stalling it—deals are a means to reshape portfolios at an accelerated pace and future-proof business.”
According to EY a leap in portfolio review activity has taken place over the past year. A hefty 41% of companies now review their portfolios every three months, compared with fewer than one in ten a year ago.
EY believes the increase in shareholder activism has prompted this interest in “portfolio shaping”. Activists, they say, are more interested in reconfiguring operations, geographic footprint or divesting underperforming business units. Boards no doubt reason that if they can get ahead of the game to make their own M&A decisions, they can head off a discomfiting encounter with an activist.
In a recent article for the Financial Times, Hernan Cristerna, global co-head of M&A at JPMorgan Chase, noted that activist campaigns focused on M&A tend to outperform the market. He also noted that many activists are driven by the need for short-term gains, a motive that doesn’t necessarily suit shareholders of all types.
Not all M&A works. Research from Willis Towers Watson and Cass Business School shows that the share price of many acquiring companies underperformed their markets last year, making 2018 “the worst performing year for dealmaking since 2008 and the first year that acquirers have underperformed for all four quarters”.
According to the Institute for Mergers, Acquisitions and Alliances, global overall activity in numbers and value fell in 2018, as did European activity.
This year may be a little different. 2019 has already seen the 10th largest deal of all time with the acquisition of Celgene Corp by Bristol-Myers Squibb for $79.4bn. There is also widespread optimism for deals in 2019, assuming the US market calms down and Brexit finds some form of resolution. The UK is expected to be one of the most active M&A markets, according to some.
But with activism expected to grow across Europe—even if activists become less aggressive in their pursuit of target companies—EY may be right that “portfolio review” will remain the in-thing for some time to come.
