LONDON, 28 OCTOBER, 2013 – Record levels of cash on balance sheets, and increasing boardroom confidence, will fuel M&A growth, according to a report from global 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 US$5.6trillion, 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% on Q2 and 26.9% 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%), whilst 63% 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 said:
"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."
He added: “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.”
Other highlights of research included:
- Cash remains king: from a financing perspective, the report also shows that cash remains king. Three in four respondents (75%) stated cash will remain the main source of funding transactions over the next five years
- Talent the top priority for success: with 67% of global corporates ranking it as the most important priority for success, and three in four in Europe.
- The innovation imperative: 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% believe innovation will be the greatest challenge to their industry in the next two years, with over half (56%) citing product service and innovation as the most significant change in their industry since the financial crisis
Life Sciences sector – business leaders adapting in the face of change; preparing for growth
- The life sciences sector was the target of 5% of all the money spent on mergers and acquisitions worldwide in 2012, some £71bn. This proportion has increased since the credit crisis – in the last five years the sector has generated an average annual deal value of £70bn, against an annual average of £43bn for the five years pre-2008
- In the past five years, new regulations have had a disproportionate impact on the sector, second only to the effect felt in financial services. Product and service innovation has also driven change, and those are expected to remain the key issues in the longer term.
- Life sciences businesses have adapted to the challenges they have faced through the increased use of partnerships and strategic alliances, and have been among the most active sectors when it comes to entering new geographic markets.
Where growth will come from?
- Growth is expected to come from organic growth in existing markets, and entering into long term strategic relationships with others. Effective business partnerships are one of the main priorities for business leaders, along with talent management.
- The main drivers for organic growth will be customer retention and enhancing efficiency, targeting both new and existing markets. Organic growth may be hampered by high barriers to entry (the highest of any sector) and by unfavourable regulatory conditions.
- More than any other sector, M&A activity will be driven by consolidation and by a desire to increase market share in existing markets. Entering new geographic markets is also on the agenda for the sector.
- Growth is expected to come from Greater China and North America in the next two years, and the same markets in the longer term.
Hogan Lovells undertook this research with FT Remark, interviewing 240 senior decision makers from public companies across the globe. Respondents were drawn from six key industries in equal proportions: consumer, energy, financial institutions, life sciences, real estate and TMT. The interviews were completed in August 2013.
About Hogan Lovells Corporate Practice
With 350 partners and more than 1,000 lawyers worldwide operating in 22 jurisdictions throughout Asia, Europe, Latin America, the Middle East, and the United States; Hogan Lovells provides a truly integrated service and advice on the most significant, complex, and sophisticated global M&A transactions, ranking 14th by volume and 20th by value globally for Q3 2013.
About Hogan Lovells
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