Despite a number of challenging economic headwinds, the market's desire for mergers and acquisitions remains strong, and analysts expect mergers and acquisitions to remain one of the major drivers of corporate growth. Ernst &Young (EY) recently published a report entitled " Global Capital Confidence Barometer, Buying and bonding: Alliances join M&A as engines of growth" which describes why the appetite for M&A remains strong despite economic stagnation and slow growth rates.
The report identifies a number of market factors which are keeping demand for M&A high, including:
- The closing of the valuation gap: The valuation gap (the difference in asset evaluation between purchasers and sellers) is starting to close. In 2015, volatility in prices, particularly among commodities, meant that there was a significant gap between what buyers and sellers thought was a fair price in valuations. In 2016, commodity prices have stabilized, leading a majority of executives to view the valuation gap to be less than 10%. Accordingly, negotiations on price are expected to be less difficult.
- An increase in distressed asset sales: Although commodity prices have rebounded from recent lows, the prolonged downturn in that sector has meant that an increasing number of companies have had to sell assets to maintain liquidity.
- A shift in private equity firms' focus: Private equity firms may be finished the net selling of their portfolio investments, a process which has taken several years. Activity on the buy-side of the market may once again be their main focus, which EY predicts would bring between $465 billion and 1.3 trillion dollars to bear on possible mergers or acquisitions.
- The rebalancing of the Chinese economy: While the report concludes that the Chinese economy is unlikely to be an engine for global growth, it is in the midst of re-orienting towards consumers. As a result, the number of Chinese outbound acquisitions has surged, as Chinese businesses are looking to acquire western corporations with strong intellectual-property portfolios.
The report ultimately concludes that M&A will remain one of the most potent tools for corporate growth in today's economy. In an era of sluggish growth, management teams will increasingly need to think about how to grow earnings and gain market advantage. M&A offers one area of diversification for growth, and successful deals can create corporate tailwinds even in the face of torpid market growth.
The author would like to thank Scott Pollock, articling student, for his assistance in preparing this legal update.
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