- More target companies considering smaller deals: Ernst & Young
- Low interest rates help buyers
- Big mergers relatively rare but IPO window is open
According to the latest Ernst & Young Capital Confidence Barometer of U.S. executives, 87 percent of U.S. companies plan to pursue merger and acquisition deals under $500 million, up from 81 percent six months ago. The data was released on April 22.
“It’s a fantastic time to transact,” Steve Krouskos, Ernst & Young’s global and Americas markets leader for transaction advisory services, said at a meeting with reporters on May 14.
Yet, memories of the 2008-2009 financial crisis and wariness of over-leveraging may be holding back deals, along with a more arduous due diligence process nowadays. While equity markets continue to touch new records this year on hopes for a sustained recovery, the M&A market is less confident.
“It’s a paradox,” Krouskos said. “There’s a feeling that there should be more deals, but there’s a hesitancy to step off.”
Companies are looking to carve out and sell non-core businesses to raise cash and hike margins, but these deals take time because of the complexity of breaking off units, he said.
Herb Engert, Americas leader of strategic growth markets, said the big club deals by sponsors prior to 2008 won’t come back, but some of those older mega-deals are starting to unwind and may spark IPOs, or carve-out transactions.
Meanwhile, Engert is seeing strong interest in emerging markets from private equity firms for deals in Nigeria, Kenya and the Middle East, he said.
While companies are flush with cash and may want to keep their powder dry, Krouskos said he’s been floating the idea to clients that risk aversion could actually create new risk: missing opportunities to grow and outflank competitors during a time of available credit.
Meanwhile, the market for IPOs remains robust for now, said Jackie Kelley, Americas IPO leader.
“IPO windows open and close very quickly,” she said. “For now, the dominant players have been financial services and real estate investment trusts. Life sciences is starting to come back and that’s one of the best indicators of confidence.”
(Correction: The spelling of Steve Krouskos has been fixed.)