Ernst & Young: Economic Slowdown Checks M&A Deal Flows

By Rob Starr, Content Manager, Big4.com

While the US economy has exhibited signs of improvement, supplemented by an increase in consumer confidence, M&A continues to be affected by volatility in the credit and stock markets and uncertainty in the global economy, particularly in the Eurozone. According to Ernst & Young’s US Capital Confidence Barometer, 55% of companies cite growth as their primary focus, up from 42% six months ago.

Over the past decade, corporate strategy relied heavily on M&A for growth. However, Ernst & Young has found more executives are coming to realize that effective portfolio management and corresponding divestitures can be essential to growth. Divesting with a focus on raising capital for investment in core businesses, emerging markets and extension of existing products and services builds value.

While the overall private equity deal environment is stabilizing, activity levels remain well below expectations considering the amount of “dry powder” and availability of deal financing. In the first half of 2012, US deal volume was down 6% (buy side and sell side combined) and US PE deal value was flat⁵. Completed deals have taken longer to close and are being sold in very competitive processes, resulting in relatively high valuations.

In the next six months, PE activity is expected to continue at a moderate pace, likely consistent with prior years. This continuation will hinge on the stability of the global geopolitical situation, particularly as the next chapter of the Eurozone unfolds. An even greater improvement in corporate confidence and re-emergence of corporate M&A activity may be required in order to see a significant surge in PE deal activity.