Executive Summary:  There is a strong consensus global M&A volumes will increase as confidence in the overall economy climbs. Below are the results of Ernst & Young’s Capital Confidence Barometer April 2013 – October 2013.  The Global Capital Confidence Barometer is a regular survey of senior executives from large companies around the world, conducted by the Economist Intelligence Unit (EIU).

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Global deal volumes and appetite expected to improve

There is a strong consensus global M&A volumes will increase as confidence in the overall economy climbs. In total, 72% of companies expect global deal volumes to improve over the next 12 months.

Twenty-nine percent of respondents expect their company will pursue one or more acquisitions in the next 12 months.

What is your expectation for global M&A/deal volumes in the next 12 months?

53% expect to do deals between US$51 million in the next 12 months, up from 46% from October 2012.

The improvement in acquisition plans (29%) is largely driven by an increasing number, and a higher quality, of acquisition opportunities. Thirty-nine percent of companies say there are quality acquisition opportunities available, compared with 30% six months ago; 50% feel more confident about the number of opportunities available, versus only 37% six months ago.

Bias toward smaller deals as conservatism persists

Consistent with sentiment over the past six months, deals are likely to remain smaller in size despite record amounts of available cash and improving credit conditions. In total, 88% of respondents planning acquisitions expect deals to be under US$500 million. The pursuit of smaller transactions aligns with companies’ overall strategy toward organic growth and lower-risk sentiment.

Valuations increasing

Expectations for increased valuations are now at their highest level in the history of our Barometer: 44% of companies expect prices/valuations to rise in the next year, up from 31% in October 2012. Just 7% of companies expect valuations to decline, compared with 27% six months ago, suggesting the market has stabilized.

Most respondents (82%) say the valuation gap is 20% or less, compared with 68% in October 2012. However, while valuation gaps are narrowing, this trend is not expected to continue over the next year, as 79% of respondents expect the gap to widen or stay the same.

Deals to span developed and emerging markets

Investment destinations continue to evolve as companies challenge their growth strategies and underlying risk tolerance. The top five countries include both emerging and developed markets: China, India, Brazil, the United States and Canada.

This is a shift from six months ago, when the US ranked second behind China, and Germany rounded out the top five instead of this year’s new entrant, Canada.

Companies remain optimistic about deals in emerging markets but are exercising more caution. In light of slowing growth, almost 70% of respondents have changed their approach to investing in these markets, of those, 45% say they will apply “further rigor.”

Divesting for value

Divestments are now an established tool for creating shareholder value. In total, 29% of respondents* either have a divestment in progress or are planning one in the next 12 months, and nearly half expect to divest in the next two years. A steady stream of divestments will provide capital to fuel growth in the future.

In total, 83% of the companies planning divestments expect that those divestments will involve the carve-out of one or more business units. These transactions — whether structured as an outright sale, spinoff, IPO or contribution to a joint venture — are highly complex and will require companies to employ formal and rigorous processes around divestment.

Viewpoint

A possible inflection point in asset valuations

A contributing cause to the ongoing slowdown in deal-making is a perceived gap in asset valuations between buyers and sellers. Companies pursuing divestments are seeking high valuations for their assets, while potential buyers are primed for discounts and reluctant to pay a premium.

However, we may now be nearing equilibrium between what buyers will pay and what sellers will accept. This equilibrium is vital, signaling the deal markets are at an inflection point and ready to rebound. The pendulum is primed to swing the other way — toward growing prices by buyers and more profitable exits for sellers.

This also suggests a comeback in market fundamentals, corporate health and a stable foundation for deal-making.

With 44% of respondents expecting M&A assets to increase in value over the next 12 months (and only 7% anticipating a decrease), companies should consider taking advantage of this inflection point now.

Profile of respondents

• Panel of almost 1,600 executives surveyed in February and March 2013.
• Companies from 50 countries
• Respondents from more than 20 sectors
• 794 CEO, CFO and other C-level respondents
• 912 companies would qualify for the Fortune 1000 based on revenue