Playing the ACE: UK executives are rebalancing their portfolios and turning to M&A in America, China and Europe to drive growth

Growth is back on the agenda for UK business…

UK executives are increasing their focus on growth, with 42% identifying it as a priority for the coming year compared to 33% of their global peers according to EY’s 13th Capital Confidence Barometer. For the first time in 18 months, growth has a higher priority than cost reduction.

…and M&A is core to achieving growth…

Economic confidence amongst UK executives is measured: 68% see the UK economy and 91% see the global economy as modestly improving, lower confidence levels than their global peers. With confidence in earnings, equity valuations and credit availability strong, M&A is seen as the route to accelerate performance.  More than half of UK companies intend to buy assets over the next 12 months.

CCB Chart 1

With UK deal value continuing to rise in 2015, M&A as a mechanism for growth looks firmly entrenched, with the market primed for further advances. Notably, all of our UK respondents expect their deal pipeline to stay the same or increase over the next 12 months, and, similarly, all expect the deal market to stay at current levels or improve.

…with the developed markets the priority…

Our Barometer shows 82% of UK executives targeting investment opportunities outside their immediate region, with the US, the Eurozone and China, the top destinations. An improvement in economic and financial conditions in both the USA and Eurozone has increased the appeal of assets exposed to these economies. The relative fall of the Euro, is also encouraging UK companies to reconsider the Eurozone, with 41% reporting their appetite for acquisitions in the region has improved. 

…as interest in the emerging markets falls…

Interest in emerging markets is subdued, with 78% of all UK respondents planning to allocate 25% or less of their acquisition capital to developing regions. (If investment was proportional to GDP growth we might expect 40 to 50% of acquisition capital to go to these markets). This reduced ambition reflects declining growth outlooks and an increased awareness of risk: 28% of UK companies identified slowing growth in emerging markets as the key risk facing their business over the next 6 to 12 months, and 22% selected increased global and political instability when asked the same question. Without doubt, UK corporates are rebalancing their geographic ambitions with a relatively higher allocation of capital to developed markets.

CCB Chart 2

…and domestic activity is likely to slow.

Despite the UK leading among developed countries in economic performance and UK executive confidence in the local economy and corporate earnings remaining upbeat and improving – 93% of UK executives  expressed overwhelming optimism in corporate earnings up from 62% in April – domestic deal-making is only expected to account for 20% of UK led M&A activity.

There are risks in the economy but the main driver of reduced UK deal expectations appears to be concerns that valuations in the UK are set to rise, 43% of executives expect this over the next 12 months with 34% seeing this lead to a widening of the gap between buyer and seller expectations.

CCB Chart 3

The focus will be on quality not quantity.

This is not growth at any cost. The proposed strategies are realistic and balanced combining organic and inorganic growth as appropriate and very mindful of risk. 83% of UK deals are expected to be bolt-ons to the existing business and only 2% will be transformative, ie dramatically shifting the focus of the business. UK executives are also much less likely to do out of sector deals, 14% compared to 48% of global respondents. All of the expected deals are expected to be below the $1 Billion mark. UK companies are planning to expand internationally but in a controlled way, looking for a small number of high quality, manageable deals rather than a scattergun approach.

Rebalancing the portfolio and playing the ACE.

Increasing corporate confidence and low but stable economic growth are leading UK companies to search for growth across all of the opportunities available to them. The world economy has rebalanced, with the range of relative growth rates between developed and emerging markets narrowing at the same time as relative risk has widened. As a result UK businesses are rebalancing their portfolios. Growth adjusted risk measures now favour the USA and Europe and China’s sheer scale means it will continue to be an important region. It seems as though the BRICs story is over for now as UK businesses play their ACE.


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