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Dec 31, 2009

M&A Focus: new sentiment indicator created

Capital confidence barometer is created by Ernst & Young


Ernst & Young (E&Y), the professional services firm, has created a sentiment indicator: the capital confidence barometer. The plan, according to E&Y, is to switch the barometer on at various points throughout 2010 to gauge changing sentiment among the world’s business elite.

‘This study provides a unique insight into what is now the most pressing issue in the boardroom: capital,’ writes Pip McCrostie, global vice chair of transaction advisory services at E&Y and the lead author of a study into the barometer’s initial findings. ‘Our results underline the fact that, although capital has always been a high priority, how organizations manage their capital agenda today will define their competitive position tomorrow.’

The barometer’s inaugural findings – which include opinions from, among others, 275 CEO, CFO and other C-suite respondents – hint at how the M&A market will play out in 2010 and, specifically, how M&A activity will be funded. The results make interesting reading for investor relations departments.

The problem, in short, is a lack of cash to meet the acquisitive ambitions of the world’s boardrooms. When asked how best to describe their position, the highest proportion of respondents (40 percent) say they would like to make some purchases but currently lack the resources to do so. By contrast, 31 percent say they are ready to execute strategies when the time is right.

The study delves further, asking for details of the specific barriers that stand in the way of M&A activity. It finds that negative investor sentiment is the biggest obstacle to acquisition strategies. When asked which obstacles have increased significantly as a result of the downturn, respondents say insufficient availability of financing comes first, with 23 percent of them ticking this option. Second, ticked by 20 percent of respondents, is investor/financier caution.

In other words, it looks like investor relations departments have got their work cut out for them. First of all, they need to convince investors to part with their cash; second, they need to convince those same investors that the money should go to that particular company, as opposed to other issuers with grand M&A designs of their own.

Of course, to a certain extent this is just business as usual. The problem, however, is that those firms that don’t secure the funding they need may become targets themselves. E&Y’s barometer also finds two thirds of respondents expecting industry consolidation to accelerate over the next 12 months, with the emergence of ‘a few industry winners’ best able to exploit acquisition opportunities.

Future obstacles

Which of the following potential obstacles to future transactions do you think have significantly increased as a result of the economic downturn?

Insufficient availability of financing - 23%
Investor/financier caution - 20%
Board/audit committee scrutiny - 15%
Regulatory pressures - 14%
Valuation uncertainty/complexity - 12%
Other - 16%

Source: Ernst & Young