October 17, 2010 10:31 pm

M&A hit by fall in confidence

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Some of the world’s top business leaders are reversing plans for mergers and acquisitions due to a sharp deterioration in confidence over the past month amid fears of the uncertain macroeconomic outlook.

Austerity measures, increasing taxes, currency conflicts and regulatory concerns, among other issues, are undermining confidence in the global economy and reducing appetite for M&A, in spite of improved funding availability.

A number of mooted deals have collapsed in the past week. On Friday, HSBC, Europe’s biggest bank, ended talks to buy a £5bn ($7.3bn) majority stake in South Africa’s Nedbank, while attempts by Sinochem of China to put together a rival bid for Potash are faltering .

Fewer than one-quarter of global companies are now actively seeking acquisition targets, according to Ernst & Young’s third bi-annual capital confidence barometer – conducted this month and based on 1,000 senior executives’ assessment of business conditions over the next six months.

“The appetite for growth through acquisition and synergistic consolidation is being outweighed by macroeconomic fears and market volatility,” said Philip Noblet, co-head of European M&A at Bank of America Merrill Lynch.

The findings are in stark contrast to the mood among chief executives six months ago, when 38 per cent of those surveyed said they would use the growing piles of cash on their balance sheets to buy growth.

The value of deals worldwide reached $1,750bn during the first nine months of 2010, a 21 per cent increase on the same period last year, according to data from Thomson Reuters.

However, some companies are expected to be opportunistic about doing deals.

Matthew Ponsonby, co-head of European M&A at Barclays Capital, said that while a small number of large transactions have made deal activity look more buoyant than it is, large strategic moves were possible, but only if thoughtfully structured. “Persistent uncertainties mean that getting agreement on valuation and the right deal structure remains difficult”.

Institutional investors have become increasingly critical of large acquisitions after a spate of value-destroying deals were struck during the run-up to the financial crisis.

Richard Turnill, head of BlackRock’s global equity team, said he would rather see management first have the confidence to invest in their own business through capital expenditure, or to return some money to shareholders.

“If executives go out and do deals before investing in their own businesses it sends a signal that they don’t see lots of potential for organic growth. Investors have not rewarded companies for M&A transactions, and when companies have gone out and spent big this year, the market reaction has been negative,” Mr Turnill said.

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