M&A Warchests Remain Locked by Regulatory, Political and Economic Uncertainty
02 October 2012
LONDON, 02 OCTOBER, 2012 - A new report by global law firm Hogan Lovells, based on 160 interviews with the most senior figures in companies across the UK, US, Continental Europe and Asia, has revealed a surprising level of optimism amongst global companies. When asked how they see their businesses growing over the next two years, nearly nine in ten (88%) anticipate growing organically in their existing markets, whilst three fifths (61%) of companies see opportunities to acquire businesses at relatively low prices. Additional research by Hogan Lovells also indicates that, at the end of August, the 500 largest non-financial companies in the world had short and long term cash reserves of around US$4 trillion. Yet, against this backdrop M&A deal activity is currently running at little more than a third of the level of five years ago
Andrew Skipper, Co-Head of the Corporate Practice Group at Hogan Lovells said: “With the OECD and others predicting a marked decline in cross-border M&A in the next year it is surprising that so many organisations surveyed in the report expressed a measured optimism towards their growth prospects in the next two years. The money and the appetite for deal making is there, with our estimate of the cash on the balance sheets of the top 500 global corporates in the region of US$4tn - huge figures when you consider the size of the current eurozone debt is US$8.2tn. Yet the report also highlights that there are major barriers preventing deals taking place - what executives say they want to do is hindered by serious concerns about on-going economic uncertainty, rising regulation and government intervention.”
Political, economic and regulatory uncertainty impeding activity
Financial regulation (44%) and labour laws (44%) top the list of legal and regulatory requirements that companies see as creating significant issues for their businesses, followed by competition policy (36%), trade barriers (30%) and other forms of protectionism. Almost nine in ten companies (89%) identify economic uncertainty as a key barrier to investment with nearly two thirds (62%) saying political uncertainty is a big problem. Whilst there is very little that can be done by corporates about political and economic uncertainty, companies are clearly taking increased precautions against risk wherever they can. A third of companies (34%) said in the survey that they are mitigating their exposure to the eurozone crisis through contingency planning for business disruption and currency risk, with almost as many (32%) hedging financial risks and just under a quarter (24%) reducing investment in the single currency area.
Protectionism and shareholder activism
Nearly a third (31%) of global companies identify China as the jurisdiction where protectionism and government intervention are increasing most quickly, with just over a quarter (26%) stating continental Europe and a fifth (21%) pointing to North America. Only 5% were concerned about the UK.
A third (35%) of companies in Asia and the US say they sense rising pressure from shareholders to invest their cash piles, but there is less pressure in the UK (25%) and Europe (18%).
Andrew Skipper concludes: "Economic uncertainty is unsurprisingly the key barrier to investment: this is why corporates are sitting on such huge balance sheets. They are keen to spend, with corporates in Asia and the US in particular sensing the pressure to do so from shareholders.
“Our analysis also confirms that senior management see no return to the heady M&A days pre-2008 and instead are resigned to an economic environment where activity may be subdued for some time. Success requires a clear strategy, a robust balance sheet, a focus on talent management and the right technology, and an understanding of regulation and protectionism.
"The appetite is there for renewed investment, especially among emerging nations. The question persists: when?”
Notes to Editors
The research report was undertaken by Consensus on behalf of the Financial Times and Hogan Lovells. Telephone interviews were conducted amongst 40 senior figures from global companies from Asia, 40 from Europe, 40 from UK and 40 from US in August 2012.
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