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Capital confidence barometer: A snapshot of corporate confidence in October 2010

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The Capital Confidence Barometer is a regular survey of more than 1,000 senior executives from large companies around the world, which is conducted by the Economist Intelligence Unit on behalf of …

The Capital Confidence Barometer is a regular survey of more than 1,000 senior executives from large companies around the world, which is conducted by the Economist Intelligence Unit on behalf of Ernst & Young. The respondent community comprises an independent EIU panel of senior executives as well as Ernst & Young's clients.

This report from Ernst & Young summarises the results of the October 2010 survey, gauges corporate confidence in the economic outlook and identifies boardroom trends and practices in the way companies manage their capital agenda.

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  • 1. Capital Confidence3rd IssueOctober 2010 Barometer Looking for growth? Our third Capital Confidence Barometer finds that while About this survey capital market conditions have improved since April, Ernst & Young’s Capital Confidence fewer businesses globally are considering mergers and Barometer is a regular survey of senior executives from large companies around acquisitions (M&A) in the next six months. the world conducted by the Economist Intelligence Unit (EIU). In April our second Barometer predicted the August surge in M&A activity in many markets The respondent community, the — now we are seeing the appetite for M&A fall away, at least over the next six months. “Ernst & Young 1,000”, is comprised of an independent EIU panel of senior In April, 38% were actively seeking M&A opportunities. That number has now dropped executives and selected Ernst & Young by a quarter even though boards are more able to respond quickly to acquisition clients and contacts. opportunities, with only 16% restricted compared to 40% in our first study one year ago. This snapshot of our findings gauges That is largely because growing optimism among executives about their own company and corporate confidence in the economic local economy prospects is dampened by increasing pessimism about the global economic outlook and identifies boardroom trends landscape. Austerity measures, increasing regulation and currency conflicts are just some and practices in the way companies of the issues undermining confidence in the global economy. The result is a greater focus manage their capital agenda. on organic growth (75% now see this as a priority) through performance improvement Profile of respondents and further cost efficiencies. • Panel of over 1,000 executives Our unique global study around capital confidence continues to underline the critical fact surveyed in September 2010 that how organizations manage their capital today will define their competitive positions • Companies from 36 countries tomorrow. How they raise, invest, optimize and preserve their capital is absolutely critical • Respondents from 38 industry sectors in these challenging times, and the Barometer gives us a clear indication of C-suite plans to achieve these strategic goals over the next 6 to 12 months. • 629 CEO, CFO and other C-level respondents The insights from these C-level respondents tell us that the global downturn is not easing, • 63 companies would qualify for the leading to increasing investor caution. We see a two-speed recovery, with more robust Fortune Global 100 based on revenues confidence in emerging markets contrasted with greater caution in many mature markets. Our latest findings also show a growing gap between the appetite to buy and the desire to The Capital Agenda sell. With fewer high-quality assets on the market we could see hostile approaches increase 1.  reserving capital: reshaping the P in the next six months. With cash war chests now available it could be the right time to make operational and capital base a strategic acquisition. There are inherent risks, but the rewards could be high. There may 2.  ptimizing capital: driving cash and O be a fall in the appetite for M&A, but we could see some bold competitive positioning. working capital; managing the portfolio of assets These are some of the market opportunities — and challenges — of tomorrow. The Barometer will help you prepare for them today. 3.  Raising capital: assessing future capital requirements and evaluating Pip McCrostie — Global Vice Chair, Transaction Advisory Services. funding sources 4. nvesting capital: strengthening I investment appraisal and transaction execution
  • 2. Capital Key highlights 73% of the Ernst & Young 1,000 feel more optimistic about prospects for their companies than six months ago. Despite improving capital conditions, Capital markets global confidence has deteriorated, which • Credit conditions for deals increasingly favorable. is in turn leading to a decline in appetite Over half (58%) said credit/capital conditions were better now than six months ago. Access to capital to fund deals for M&A. While many companies now have has also improved. A third of respondents (36%) state the resources to execute a transaction, that access to funding is not a problem for their companies, compared to 26% in April. fewer are actively looking to do a deal than • Uneven picture of credit/capital conditions. Globally six months ago. The Ernst & Young 1,000 capital availability is more varied. Among the BRIC* nations, are now focusing on organic growth and the majority of executives said the situation had improved. But in the UK and US, only 33% and 47%, respectively, ensuring that their businesses are as lean see such an improvement. and profitable as possible. • Deleveraging trend continues. Forty-eight percent of all respondents said they need to refinance loan or debt Economic outlook obligations in the next four years — a decrease in the proportion that was in this position in April (58%). • Global downturn not easing. Thirty-four percent of This is further evidenced by the 6% decline in the number companies believe recovery will happen within the next of companies in the survey with a debt-to-capital ratio 12 months, compared with 40% in April 2010. Most feel exceeding 50%. they will have to learn to operate efficiently in the existing market for some time to come. • Wall of refinancing remains. There is less pressure to refinance in the next six months, as many have refinanced • Optimism increasing for local economies. Sixty-seven in advance of maturities. Nearly two-thirds of companies that percent feel more confident about the prospects for their do need to refinance said they have to do so within a year, local economy than six months ago. Levels of confidence virtually the same number as in April. in India and China remain high, but former confidence leader Australia drops out of the top five most confident economies. Russia and Germany enter the top five. Mergers and acquisitions outlook • Downturn in global economic confidence reverses upward Optimism by country April 2010 to October 2010 M&A trend. Despite improving capital conditions and a Australia 92% decrease in the number of companies that said they were 92% India India 91% 89% Russia restricted in pursuing inorganic opportunities, those that are Brazil 83% 84% Germany actively looking for an acquisition fell by a quarter (from 38% China 79% 82% China to 29%) in stark contrast to the strong appetite we saw between November 2009 and April of this year. Japan 72% 69% Brazil • Trend for organic growth continues. Nearly half (46%) Germany 64% 66% Australia 66% France of respondents said this was their focus over the next UK 58% 54% US six months, compared to 38% in April and 25% in 2009. US 56% 54% UK Seventy-five percent of companies say organic growth Canada 53% 53% Canada Russia 47% is their capital allocation priority. More management France 44% time will be spent on performance improvement and 43% Japan realization of operational synergies across their portfolios in the year ahead. Apr 2010 Oct 2010 28% Yellow highlight indicates those where confidence has improved by more than 5% In the next six months 28% are likely to execute transactions, down from 47% in April. • Fifty-nine percent of respondents expect the downturn in their own industries to end within 12 months. Automotive, oil and gas and power and utilities show the • High growth markets attract acquisitions. With low highest confidence in improvement in industry prospects. growth potential in developed markets, the emerging markets look increasingly attractive. Acquisitions in these nations show an upward trend, moving from 21% in November 2009 to 31% in October 2010. Joint ventures (JVs) and alliances are increasingly popular and the most likely market entry strategies. * BRIC = Brazil, Russia, India and China 2
  • 3. Which statement best describes your organization’s How likely is your company to execute acquisitions infocus over the next six months? the following time periods? 70Actively looking to take advantage of M&A 60 67%70 57% 50 41% 54%60 40 47% 41%50 38% 30 33%40 28% 31% 29% 20 24%30 1020 010 Nov 2009 Apr 2010 Oct 2010 0 0-6 months 6-12 months 1-2 years Nov 2009 Apr 2010 Oct 2010Focused on organic growth70 Which of the following are you likely to undertake or seriously consider in the next 6 and 12 months?6050 46% Acquisition in developed markets 38%40 7030 25% 6020 5010 40 0 30 26% 25% Nov 2009 Apr 2010 Oct 2010 22% 20 21% 20%Restricted in ability to pursue inorganic opportunities 10 15%70 0 Nov 2009 Apr 2010 Oct 201060 6 months 12 months50 40%40 Acquisition in emerging markets30 7020 14% 16% 6010 50 0 40 Nov 2009 Apr 2010 Oct 2010 35% 31% 30 26% 31% 27%Focused on survival 20 21%70 1060 0 Nov 2009 Apr 2010 Oct 201050 6 months 12 months403020 10% 9%10 4% 0 Nov 2009 Apr 2010 Oct 2010 3
  • 4. Preserving R Results Companies’ increasing ability to invest in their businesses is fortified by easing access to finance. Low rates have made debt markets increasingly attractive, and banks are more willing to work with borrowers’ circumstances. As a result, Preserving capital 52% of companies have no need to refinance loans or other debt obligations, an increase of nearly 10% on April 2010. Companies have been effectively preserving capital Of the 48% of companies that do need to refinance, throughout the economic cycle and are now focused on 63% plan to do it within the next 12 months. achieving efficiencies and revenue growth in their core businesses. Many think that they can exploit the current How soon are you likely to refinance loans conditions of improving financial markets and global or other debt obligations? opportunities only once they have put their houses in order. ■ Oct 2010 ■ Apr 2010 With a clear focus on organic growth, 40% of the Ernst & Young 1,000 said they needed to restructure their core businesses. 22% Within 6 months Half of these plan to focus on performance improvement. 28% To what extent do you anticipate the need to 41% 6-12 months restructure the following? 35% Great or greatest need to restructure core business 30% 1-2 years 70 26% 60 50% 7% 50 3-4 years 40% 11% 40 35% 30 0 10 20 30 40 50 60 20 10 Optimizing capital 0 Organic growth will take up much of management time in Nov 2009 Apr 2010 Oct 2010 the year ahead. Great or greatest need to restructure a subsidiary/ When asked to state their organizations’ focus over the non-core business before disposal next six months, nearly half (47%) said organic growth, up from 38% in April. 70 60 Further, 76% said that organic growth through investment in existing businesses would be their priority when optimizing 50 47% their asset portfolios. 40 35% 29% 30 In considering your asset portfolio which is considered 20 the most important? ■ Oct 2010 ■ Apr 2010 10 0 Organic growth Nov 2009 Apr 2010 Oct 2010 76% through investment in 78% existing business Great or greatest need to restructure an acquired business Cost efficiencies 67% 70 across existing assets 45% 60 57% 50 44% Operational 61% synergies within 40 33% the portfolio 46% 30 Increasing 52% 20 porfolio flexibility to react to change 64% 10 0 Reducing invested 45% Nov 2009 Apr 2010 Oct 2010 capital supporting operations 59% Capital generation 41% through asset sales 71% 0 10 20 30 40 50 60 70 80 4
  • 5. Raising Cutting costs and finding efficiencies also show a strong upward trend, with 67% of respondents focusing on cost What will be your main source of debt financing in the next 12 months? efficiencies across existing assets in the months to come, an increase of 22 percentage points from April. Cash flow Cash and liquidity remain a priority, and there was a large increase 70 (14 percentage points) in respondents that will address this 61% 60 56% challenge. Most companies have learned their lessons from 48% the financial crisis and are continuing to do what they can to 50 promote a culture of cash consciousness. Only 17% of the 40 Ernst & Young 1,000 report they have made little or few 30 efforts to improve cash and working capital practices. 20 When optimizing capital from transactions, realizing both 10 financial and non-financial synergies fully and quickly 0 remains important. Nov 2009 Apr 2010 Oct 2010 Bank loans 66% rank synergy identification and achievability as important or highly important when 70 planning and structuring transactions. 60 50 41% Raising capital 40 36% Whether it’s to finance organic growth, fund an acquisition 30 19% or restructure a balance sheet, a company’s ability to raise 20 capital quickly and effectively is integral to its growth potential. 10 Access to funding is improving for many companies, particularly 0 Nov 2009 Apr 2010 Oct 2010 those companies with revenues in excess of US$5billion. Over the next 12 months, those that have excess capital are likely to view the M&A market opportunistically while still Divestments have decreased in popularity as a vehicle to raise focusing on organic growth. For those that have not secured capital. Valuation and pricing issues remain the major obstacle. new financing or refinanced debt the prospect becomes Fewer respondents said they were likely or highly likely to make increasingly difficult as capital becomes scarce and expensive. a divestment over the next six months (down to 15% from 38% Some companies could become targets for acquisition. in April). For the minority who plan divestments, selling to a third party or entering a JV or alliance was the preferred route. A successful sale to either will require companies to provide 36% of the Ernst & Young 1,000 state that access to buyers with visibility of information on future earnings and funding for capital projects is not a problem for their organizations. cash flows as well as historic business performance. How likely is your company to execute divestments in 52% say investor caution has increased in the current the following time periods? business environment and is now the biggest obstacle to future transactions. 70 60 50 42% Cash still dominates deal financing, with 61% planning to fund 40% deals with cash in the next 12 months. Except for bank loans, 40 28% which have almost doubled to 36%, the use of other forms of 38% 21% 30 21% debt and bonds has declined considerably. 20 18% 10 18% 15% 0 Nov 2009 Apr 2010 Oct 2010 0-6 months 6-12 months 1-2 years 5
  • 6. Investing Investing capital Over half of those who plan to invest in the emerging markets expect to enter via a JV or strategic alliances and this also As the trend for companies to concentrate on organic growth shows an upward trend. increases, the Ernst & Young 1,000 have a lower appetite for M&A activity. But this may be a deliberate choice, as only 16% 33% are restricted in their ability to pursue inorganic growth, of businesses expect to enter into compared to 40% a year ago. a JV or strategic alliance in the next 12 months. However, healthy cash reserves are boosting confidence and it is likely that pent up appetite for assets may lead to Percentage of respondents likely or highly likely to unexpected competitive situations. Companies will need to undertake or seriously consider JVs and alliances act quickly, but with caution, if strategic transactions take in the next six and 12 months? place in their segments. The speed of the market can heighten the risk of the wrong asset being bought for the wrong reason 70 at an inflated price. 60 50 Investments that will be considered are those that fill a strategic gap — providing access to new product markets, 40 33% 29% geographies or distribution channels. A premium is likely 30 21% 31% to be paid for companies that can demonstrate they can 20 be successful even in a slower market. 18% 15% 10 0 How likely is your company to execute acquisitions Nov 2009 Apr 2010 Oct 2010 in the following time periods? 6 months 12 months 70 67% 60 57% 54% Over the last year, boards have responded to ongoing 41% 50 33% uncertainty by improving their ability to respond quickly to 41% 40 47% opportunities that may arise. Half of all respondents now feel well positioned to execute an acquisition at short notice, 30 28% up from 36% in 2009. 20 24% 10 How well is your company positioned (in terms of finance 0 and decision-making) to execute an acquisition at short Nov 2009 Apr 2010 Oct 2010 notice (within 30 days)? 0-6 months 6-12 months 1-2 years ■ Oct 2010 ■ Nov 2009 Most companies recognize the imperative for an emerging We are very well 50% positioned to markets strategy to position them for future growth and act quickly 36% plan M&A accordingly. A third (31%) said they were likely We are not very to undertake or seriously consider an emerging market well positioned to 27% acquisition in the next six months. By contrast, interest in act quickly, but would pursue the 46% developed markets acquisitions has remained flat over the opportunity last six months. 11% We are poorly positioned 6% Acquisition in emerging markets 70 12% Uncertain 60 12% 50 0 10 20 30 40 50 60 70 80 40 35% 31% 30 26% 31% 27% The top three issues that companies consider important when 20 21% planning and structuring transactions remain the same: impact 10 on capital structure, ability to identify and mitigate risk, and 0 synergy identification. However, the big issue climbing the Nov 2009 Apr 2010 Oct 2010 agenda was the potential impact of transactions on tax 6 months 12 months planning. The proportion saying this was an issue (61%) increased by seven percentage points from April. With most governments needing cash most corporates anticipate tax rates will rise. 6
  • 7. Conclusion • Capital market conditions are improving for M&A as • Overall, investor and boardroom caution over the next six favorable cash and credit positions relieve funding months is driving a greater focus on organic growth — such restrictions on deals. as operational synergies and further cost efficiencies. • Nevertheless, the appetite for M&A is declining for at least • Even though the survey predicts a fall in M&A overall the next six months due to the uncertain global economic for the next six months, as we noted in April, motivated picture. More companies are reluctant to acquire or divest and bold acquirers will use the continuing uncertainty to due to increased taxes, austerity measures and regulatory take first-mover advantage. Critically, more companies changes — among other issues — which are undermining are now able to respond rapidly to opportunities than confidence in the global economy. six months ago. • We see evidence of ‘two-speed’ recovery, with • Given the increasing gap between the number of potential emerging markets ahead of developed counterparts buyers and willing sellers — and the reduction of quality and there remains a stronger appetite to acquire in assets in the market — we are likely to see a continuation high-growth markets. of unsolicited bids.Survey demographicsWhat are your company’s annual global revenues in US$? What is your current debt-to-capital ratio? US$5b or more 13% Less than 25% 65% US$1b–4.9b 38% 25–49.9% 25%US$500–999.9m 23% 50–74.9% 6% Less than US$499.9m 26% 75–100% 4% 0 5 10 15 20 25 30 35 40 0 10 20 30 40 50 60 70What is your position in the organization? In which industry is your company? C-level 58% Financial services 155 Manufacturing 144 SVP 18% Automotive 89Head of business 13%unit/department Consumer 4% 88 productsManager or other 11% Power and utilities 69 Professional 0 10 20 30 40 50 60 services 69 Oil and gas 68In which region are you located? Life sciences 62Europe, Middle East, Retail andIndia and Africa Asia Pacific Americas wholesale 51 43% 24% 33% Healthcare 34 0 25 50 75 100 125 150 175 200 Number of respondents, other sectors less than 30 respondents. 7
  • 8. Ernst & Young Assurance | Tax | Transactions | AdvisoryContacts About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisoryIf you would like to discuss your company’s capital agenda, please services. Worldwide, our 141,000 people are united by our shared values and ancontact your usual Ernst & Young advisor or any of the contacts unwavering commitment to quality.listed below. We make a difference by helping our people, our clients and our wider communities achieve their potential.Name Telephone number Email Ernst & Young refers to the global organization of member firms of Global Ernst & Young Global Limited, each Pip McCrostie of which is a separate legal entity. Global Vice Chair +44 (0) 20 7980 0500 pip.mccrostie@uk.ey.com Ernst & Young Global Limited, a UK Transaction Advisory Services company limited by guarantee, does not Steven Krouskos provide services to clients. For more Global and Americas +1 404 817 5090 steve.krouskos@ey.com information about our organization, Markets Leader please visit www.ey.com. Transaction Advisory Services About Ernst & Young’s Transaction Michael Rogers Advisory Services Global Markets +44 (0) 20 7980 0200 michael.rogers@ey.com How organizations manage their capital Transaction Advisory Services agenda today will define their competitive position tomorrow. We work with our Americas clients to help them make better and Richard Jeanneret more informed decisions about how Americas Leader +1 212 773 2922 richard.jeanneret@ey.com they strategically manage capital and Transaction Advisory Services transactions in a changing world. Whether you’re preserving, optimizing, raising Europe, Middle East, or investing capital, Ernst & Young’s India and Africa (EMEIA) Transaction Advisory Services bring Joachim Spill together a unique combination of skills, EMEIA Leader +49 6196 996 25366 joachim.spill@de.ey.com insight and experience to deliver tailored Transaction Advisory Services advice attuned to your needs — helping you drive competitive advantage and increased Asia Pacific and Japan shareholder returns through improved decision making across all aspects of your John Hope capital agenda. Asia Pacific Leader +852 2846 9997 john.hope@hk.ey.com Transaction Advisory Services Kenneth G. Smith Japan Leader +81 3 5401 6663 kenneth.smith@jp.ey.com Transaction Advisory ServicesAcknowledgements © 2010 EYGM Limited.Our special thanks go to the Ernst & Young 1,000* for their contribution to this survey. All Rights Reserved.*  he Ernst & Young 1,000 comprises an EIU panel of senior executives and selected T EYG no. DEO199 Ernst & Young clients and contacts who participate in the Capital Confidence Barometer This publication contains information in summary form on a biannual basis. The surveys are conducted on an independent basis by the EIU. and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor. www.ey.com8