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M&A outlook unclear - BCG.


Frankfurt: Boston Consulting Group, BCG, reports that the stock market correction has yet to trigger more deal plans, and concerns about valuation and the unavailability of suitable targets persist. Meanwhile, the internal conditions for M&A have improved, including a focus on growth over further deleveraging, more strategic clarity, and greater management capacity to handle deals, which are improving companies' readiness. A healthy number of companies expect to restructure via deals in the meantime.

The fourth annual UBS-BCG CEO/Senior Executive M&A Survey offers insights into companies' M&A and restructuring intentions for 2012 and is one of the most extensive of its kind. The findings draw on the responses of 148 CEOs and senior managers from publicly listed companies in Europe.

Key findings include the following:

  • A stable core remains, with one in six companies expecting to make a large-scale acquisition in 2012 (unchanged from 2011); large companies are twice as likely to do so.
  • The results reveal a hardening of resolve to stay on the sidelines: 46 percent of companies say they "definitely won't" or are "very unlikely" to make a large-scale acquisition, versus 41 percent last year.
  • Sixty-four percent see investing in growth via M&A or capital expenditure as the best possible use of their balance sheets, indicating that deleveraging is less of a priority; only 7 percent and 2 percent, respectively, prefer share buybacks or increased dividends.
  • Two other internal barriers to deals have declined: limited management capacity ( 4 percent compared with 8 percent last year) and the need to finalize strategy (7 percent compared with 13 percent last year).
  • Almost one-third of companies expect acquisitions of European public companies in their sector during 2012.
  • Around one-quarter of companies expect a transformational deal in their sector in 2012, compared with one in five last year.
  • A lack of available targets was cited as the biggest constraint on M&A; this could signal a shortage of "pure play" targets, or of nonpure plays that require time-consuming restructuring.
  • The stock market correction has yet to boost M&A plans; valuations are still viewed as a hindrance.
  • Buyers expect more deals to be cross-continental and oriented toward emerging markets, which raises execution risk and sensitivity to market volatility.
  • M&A may be in a holding pattern, but 30 percent of companies expect to undertake deal-based restructuring over the next 12 months.

One in six companies (16 percent) expects to make at least one acquisition of a business with sales of more than €500 million in 2012, while larger companies are almost twice as likely to do a deal on this scale.

The research identified two main objectives driving European M&A deals in the coming year: to improve margins in slow-growing markets at home through consolidation and to expand in fast-growing markets in developing nations such as China, India and Brazil. Around one in four executives expect to make "transformational" deals in 2012, and 83 percent cited consolidation as the prime motive--a significant rise from last year's M&A survey. At the same time, the number of respondents citing expansion into emerging markets as a top M&A priority jumped from 16 percent to 28 percent this year.

Companies show little inclination to return surplus capital via buybacks or dividend hikes, despite balance sheets being as strong as they have been in eight years, instead seeing M&A as an opportunity for step-change growth or deal-based restructuring.

The majority of surveyed companies do not see the European stock markets as offering acquisition bargains, with 39 percent citing high valuations as a barrier to M&A.

However, companies' plans reflect a degree of continued caution. The survey reveals that targets with a good strategic fit are increasingly difficult to find. The top M&A barrier cited this year by 45 percent of executives in many industries was a paucity of problem-free targets that make neat strategic fits, some having already been acquired or nested in larger businesses.

Almost half of respondents (48 percent) believe that M&A in their sector involving European companies is most likely to be cross-continental (compared with 32 percent last year), indicating an increase in the perceived execution risk of deals and a heightened sensitivity to market volatility.

"M&A activity next year will largely hinge on macroeconomic factors," said Alexander Roos, a BCG partner and coauthor of the report. "If worries linger, 2012 could be very difficult for M&A. If they dissolve, it could be a strong year."

"Industries haven't stopped evolving and the growth imperative hasn't dissolved. Beyond that stable core of one in six, there's a swath of companies needing to transact but not yet willing to take on plain-vanilla or more complex deals without a bigger price discount. This will be the case until market risk premiums and volatility subside. In the meantime, there is a healthy pipeline of restructurings," said Daniel Stillit, head of special situations research at UBS.

"The strategic challenges facing many industries are so large that they cannot be met only through organic means," said Roos, who leads BCG's global Corporate Development practice. "M&A is increasingly needed if a company is to improve its competitive position fast enough. But good execution is also increasingly vital."

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