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Global Capital Confidence Barometer

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The Capital Confidence Barometer is a regular survey of more than 1,500 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 1,500 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 February and March 2012 survey, gauges corporate confidence in the economic outlook and identifies boardroom trends and practices in the way companies manage their capital agenda.

Some of the key findings include:

Despite a more favourable deal making environment, only 31% of those surveyed expect to pursue an acquisition in the next 12 months down from 41% in October 2011. In contrast, the number of businesses looking to sell assets has risen from 26% to 31%.

Companies headquartered in India, UK, the US and Germany were among the most bullish, while their counterparts in Japan and Russia were less so. When asked where they will do deals, China, India, the US, Brazil and Indonesia were the top five target markets.

In terms of acquisitions, companies in the financial services, life sciences, oil and gas, technology and consumer products sectors said they were more likely to do deals. Metals and mining, automotive and power and utilities companies are less positive in their M&A outlook.

Almost half of the companies that have re-engaged in M&A or who are at least thinking about it say that they will be using cash as their primary source of funding.

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  • 1. Global Capital6th issueOutlook April 2012 – October 2012 Confidence Barometer Proceeding with caution? Conservatism drives M&A outlook down and appetite for divestment up Our sixth Global Capital Confidence Barometer finds that About this survey despite a more favorable deal making environment, leading The Global Capital Confidence Barometer corporates are not yet convinced to engage in M&A. Only 31% is a regular survey of senior executives from large companies around the world, of those surveyed said they expected to pursue an acquisition conducted by the Economist Intelligence in the next 12 months — a 24% fall compared with October 2011 Unit (EIU). Our panel is comprised of and the lowest figure since the barometer began in 2009. select Ernst & Young clients and contacts, and regular EIU contributors. This snapshot In contrast, the number of businesses looking to sell assets has risen by nearly 20% — of our findings gauges corporate confidence a clear sign that companies regard portfolio management and a renewed focus on their in the economic outlook, and it identifies core business as a priority. boardroom trends and practices in the way This change in sentiment comes at a time when the fundamentals for M&A are stronger than companies manage their capital agenda. they have been for some time. Credit constraints are lower and corporate cash balances are Profile of respondents high, while confidence is rising following a prolonged period of macroeconomic instability. The valuation gap between buyers and sellers is also narrowing. • Panel of more than 1,500 executives surveyed in February and March 2012 So why do we see M&A appetite falling in what should be a positive dealmaking climate? • Companies from 57 countries While corporate executives are in a more confident frame of mind, they are still • Cross-section of respondents from fundamentally cautious. Persistent market volatility, austerity measures, structural issues 40 sectors (primarily the Eurozone crisis) and potential for slowing growth in emerging markets have • 770 CEO, CFO and other C-level continued to dampen the appetite for acquisitions. respondents For the time being, conservatism among our respondents is dictating M&A sentiment, • More than 400 companies would and buyers are proceeding with caution. However, if key stakeholders exert enough qualify for the Fortune 500 based pressure for greater returns, M&A could again rise to the top of the capital agenda. on revenues Pip McCrostie, Global Vice Chair, Transaction Advisory Services The Capital Agenda Based around four dimensions, it helps companies consider their issues and challenges, understand their options and Key findings make more informed capital decisions. • 52% feel the global economy is moderately improving 1.  reserving capital: reshaping the P operational and capital base •  onfidence in the local economy triples for the US and C 2.  ptimizing capital: driving cash O doubles for the UK and working capital and managing the portfolio of assets •  M&A appetite down 24% 3.  aising capital: assessing future R capital requirements and assessing • Intention to sell up nearly 20% funding sources 4.  nvesting capital: strengthening I investment appraisal and transaction execution
  • 2. Economic outlookGlobal economic outlook gains momentum Earnings and employment growth fuel confidenceAfter a turbulent period in the second half of 2011, the global Sentiment around corporate earnings and economic andeconomy shows some signs of stabilizing. The restructuring of employment growth underpin a more positive outlook inGreek debt has provided some much-needed breathing space in corporate confidence. In fact, 88% plan to maintain or increasethe Eurozone crisis. In the US, a falling unemployment rate, their current workforce in the next 12 months. In addition,improving credit markets and stronger consumer confidence respondents indicate credit availability and the regulatorysuggest that a slow recovery is forming. Supported by this more environment are showing modest signs of improvement. Despitepositive outlook and an injection of liquidity from central banks, these encouraging indicators, respondents continue to thinkglobal equity prices have rallied, and corporate and government volatility in financial markets poses a concern. Only 5% arebond spreads have narrowed. confident about the prospects for short-term market stability, compared with 14% six months ago. Successful companies mustCompared with six months ago, when we published our previous learn to live with this increased volatility as the “new normal.”Global Capital Confidence Barometer, executives are markedlymore optimistic about the economic situation. The percentageof respondents who think the global economy is improving has Please indicate your level of sentiment in the followingincreased from 26% in October 2011 to 52% in April 2012. The drivers of confidence at the global level.vast majority believe the improvement is modest as opposed tostrong. Only 20% are pessimistic about the economy, compared % Respondents Positivewith 37% six months ago. Corporate 44% earnings 33%What is your perspective on the state of the globaleconomy today? Economic 44% growth 24% Strongly 7% 38% Employmentimproving 3% growth 22% Modestly 45% 30% Creditimproving 23% availability 24% 28% 28% Stable Regulatory 37% environment 21%Modestly 18% Short-term 5%declining market 32% stability 14% Strongly 2% declining ■ Apr-12 ■ Oct-11 5% ■ Apr-12 ■ Oct-1152% 88% view the global economy as improving, double plan to maintain or increase their current the 26% seen in October 2011 workforce in the next 12 months2 Global Capital Confidence Barometer
  • 3. Confidence shifts from emergingto developed markets ViewpointAfter three years in which corporations viewed emerging Austerity mentality takes hold in Eurozonemarkets as the brightest hope for global growth, there are Companies based in the Eurozone display a moremodest signs of a shift in sentiment. The number of respondents negative sentiment toward their local economies thanwho believe the UK economy is improving has more than their counterparts across the globe. Sovereign austerity,doubled in the past six months and, in the case of the US combined with a heavy emphasis on corporateeconomy, almost tripled. By contrast, there is a decline in cost-cutting, will make economic growth even morepositive sentiment for both China and India. These key emerging difficult in the future.economies are still growing much more quickly than developedmarkets, but their pace of expansion has slowed. China has European respondents will continue to focus onsuffered from a slowdown in exports to Europe and North cost-cutting, supply chain rationalization, and theAmerica, while India continues to be challenged on a number divestment of non-core assets to achieve operationalof fronts. fitness. When asked how they are managing through the Eurozone crisis, 55% of European respondents cited costWhat is your perspective on the state of your local reduction as their primary focus, which is a significantlyeconomy today? higher rate than the rest of the globe. 34% All 50% 86% believe the Eurozone crisis has affected 37% their business 36% 29% Spotlight on China 14% Oct-11 Apr-12 UK US Our sixth Global Capital Confidence Barometer shows a 16% 32% 25% 65% greater focus on stability for Chinese respondents across 36% a number of metrics: 34% 45% • 75% of Chinese respondents now view their local 48% economy as stable, compared with 59% in October 41% 28% 2011; although those that view their local economy 23% as improving has dropped from 27% to 16% 7% • Confidence in credit markets also dropped, although Oct-11 Apr-12 Oct-11 Apr-12 the percentage of respondents who view their credit China India availability as stable has increased by 62%; from 27% 16% 61% 47% 47% to 76% 75% • While fewer expect to add new jobs, an increased 59% number of Chinese respondents (70%) are aiming to 24% maintain the current size of their workforce, compared 21% with October 2011 (52%) 29% 14% 18% Given its growth potential relative to developed markets, 9% Oct-11 Apr-12 Oct-11 Apr-12 China is still the most popular choice for those respondents seeking outbound investment opportunities. This interest is ■ Improving ■ Stable ■ Declining led by the US, Australia, Singapore, the UK and Canada.US local confidence triples;UK local confidence doubles Global Capital Confidence Barometer 3
  • 4. Access to capitalCredit conditions improving globally Global deleveraging trend slowsThe Barometer panel believe credit conditions continue Many companies have taken advantage of improved creditto show signs of improvement compared with six months ago. conditions and a favorable rate environment to strategically use additional leverage and reduce their cost of capital.Please indicate your level of confidence in creditavailability at the global level What is your current debt-to-capital ratio? All 61% 24% 30% 51% 44% 45% 33% 27% 32% 12% 8% 4% 4% 25% Less than 25%–49.9% 50%–74.9% 75%–100% 25% Oct-11 Apr-12 ■ Apr-12 ■ Oct-11 UK US 13% 23% 24% 36% 46% High levels of liquidity among yield-focused investors have 38% 46% created favorable conditions for corporate debt markets. 45% Companies are no longer looking only to reduce the cost of finance. Now that interest rates have been at historic lows for 41% 39% 30% some time, those benefits have already largely been achieved. 19% Instead, companies are seeking to optimize their capital structures and reduce their overall cost of capital, through Oct-11 Apr-12 Oct-11 Apr-12 rebalancing debt and equity levels; increasing debt maturities; or shifting short-term bank lines of credit to other forms China India 22% 10% 20% 20% of debt finance, such as private placements. 76% 47% 36% 42% Debt increases as a source of deal financing While cash is still the primary source of deal financing, the 44% 38% popularity of debt as a funding source is on the rise. Thirty-nine 31% percent of respondents expect to use debt to finance deals, up 14% from 33% six months ago. Oct-11 Apr-12 Oct-11 Apr-12 Financing deals with cash is often fast and easier but lower rates ■ Improving ■ Stable ■ Declining and better availability of debt financing is likely to encourage corporate acquirers to use more debt. What is your likely primary source of deal financing75% in the next 12 months? view credit availability as stable or improving ■ Cash ■ Equity 18% ■ Debt Countries with the highest debt-to-capital ratios: 43% Italy, the Netherlands, Russia, Singapore, Spain 39%4 Global Capital Confidence Barometer
  • 5. GrowthDesire for growth continuesGrowth continues to remain important to the Barometer panel, With US$7.8 trillion of cash on the balance sheets of thewith the highest percentage of respondents ever, 52% citing Global 1,000*, companies are deciding whether to returngrowth as their primary focus. This represents a significant shift this cash to shareholders in the form of dividends or sharein sentiment compared with two years ago, when just 38% of buybacks, allocate it to value-creating investment opportunitiescompanies listed growth as their top priority. or maintain cash reserves. In general, respondents are more likely to channel their excess cash into organic growth opportunities, rather than return it to shareholders. However,Which statement best describes your organization’s given slow GDP growth across the globe, delivering toplinefocus over the next 12 months? growth will be challenging. Companies must be nimble and flexible to capitalize on growth opportunities, both organic 49% 52% and inorganic. 44% 40% At what point will shareholders eventually exert pressure on companies to do more with excess cash? 7% 8% Oct-11 Apr-12■ Growth If you have excess cash, which of the following■ Maintain stability will be your focus over the next 12 months?■ Survival Organic 50% growth 49% Paying 18% down debt 22% % focused on growth Inorganic 16% growth 52% 15% 51% 49% Paying 11% 46% dividends 10% Buying 5% back stock 38% 4%Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 ■ Apr-12 ■ Oct-11 *Source: S&P Capital IQ, 11 April 2012 Global Capital Confidence Barometer 5
  • 6. Mergers and acquisitions outlookAppetite for M&A declinesWhile most of the ingredients necessary for a deal recovery On the positive side, M&A fundamentals are becomingare now in place — plentiful cash reserves, adequate credit more favorable. Respondents believe the number of dealavailability and rising economic confidence — the M&A market opportunities is increasing and the quality of the potentialcontinues to be restrained by conservatism. Only 31% of targets continues to improve. They also say that the likelihoodrespondents stated they plan to pursue acquisitions in the next of closing deals is greater than it was six months ago.12 months, compared with 41% in October 2011 — drivenprimarily by a reduced appetite to do deals in Europe, Japan Level of confidence at the global level (% positive & stable)and South America. Number 86%Do you expect your company to pursue acquisitions of deals 82%in the next 12 months? Quality 85%Expectations to pursue an acquisition of deals 80% 57% Likelihood 87% of closing deals 81% 41% ■ Apr-12 ■ Oct-11 41% 38% 31% Top investment destinations 1. ChinaApr-10 Oct-10 Apr-11 Oct-11 Apr-12 2. India 3. US44% of companies with US$5b and greater in revenue expect to pursue acquisitions in the next 12 months 4. Brazil 5. IndonesiaWhere will the deals be done?The sectors that intend to be most active in acquisitions arefinancial services, life sciences (including healthcare),consumer products, oil and gas, and technology. 37% of financial services and 33% of consumer products respondents expect to pursue acquisitions in the next 12 monthsCompanies headquartered in India, the UK, the US and Germanyare expected to be the most active for M&A.Given its relative growth potential, China remains the topinvestment destination, followed by India, the US, Braziland Indonesia.6 Global Capital Confidence Barometer
  • 7. Divesting shifts from contingency The top countries planning to divestto core strategy 1. BrazilBy contrast, respondents expect the number of divestmentsto increase over the next 12 months. The percentage likely 2. Japanto sell assets over this period has risen nearly 20%, from 26% 3. UKto 31%. A key focus for companies is to streamline their 4. Germanyorganizations and make decisions about the businesses in 5. Canadawhich they should be competing. This focus on the corebusiness enhances shareholder value and can provide a wayto raise cash in order to compensate for the underperformanceof the aggregate business. ViewpointIs your company likely to make an asset sale/divestmentin the next 12 months? Carving out to unlock value Conservatism, driven by persistent volatility, has caused 42% divesting to move up the corporate agenda. Viewed as a potential safer route to value creation, 31% of our respondents now plan to do a carve-out in the next 12 months. Those planning to divest has increased 55% from a year ago. 26% 31% Often under pressure from boards, companies are looking 21% carefully at the types of operations they consider to be 20% core. By extracting assets that are not a strategic fit, companies can enhance shareholder value. Those wanting to win the competition for capital will have to exerciseApr-10 Oct-10 Apr-11 Oct-11 Apr-12 more rigor around portfolio optimization. This effort will require companies to develop a more professional approach and focus to the divestment process.31% of companies plan to divest assets; the same as those planning to acquire The top sectors planning to divestWhat are the main drivers of your company’s planneddivestment activity? 1. Oil and gas 2. Life sciences Focus on 56% 3. Consumer products core assets 48% 4. Mining and metals Enhance 25% 5. Power and utilities shareholder value 28% Raise cash to compensate for 23%underperformance 55% of aggregate 19% business increase in those likely to divest compared to a year ago Shed 17% underperforming business unit 32% Fund inorganic/ 17%M&A growth plans 20% ■ Apr-12 ■ Oct-11 Global Capital Confidence Barometer 7
  • 8. Survey demographics What are your company’s annual global revenues in US$? What is your position in the organization? $5b or C-level 26% executive 49% more $1b to Head of $4.9b 27% BU/dept 30% $500m to SVP/VP/ $999.9m 26% director 21% Less than $500m 21% What best describes your company ownership? Proportion of top industries represented Publicly Financial listed 48% services Privately Automotive owned 39% Government Consumer or state-owned 6% products enterprise Power & Family-owned 4% utilities Private equity Mining &portfolio company 3% metals Life sciences* Oil & gas What region is your company based in? Technology Professional services Retail & wholesale 29% 34% * Healthcare/provider care, pharma, biotech 37% ■ Asia–Pacific ■ Americas ■ Europe, Middle East and Africa 8 Global Capital Confidence Barometer
  • 9. Notes Global Capital Confidence Barometer 9
  • 10. Contacts10 Global Capital Confidence Barometer
  • 11. If you would like to discuss the comprehensive survey results or those specific to your sector orgeography, please contact your Ernst & Young advisor or any of the contacts below.Name Telephone Email Global Pip McCrostie Global Vice Chair +44 20 7980 0500 pip.mccrostie@uk.ey.com Transaction Advisory Services Steven Krouskos Global and Americas +1 212 773 3975 steve.krouskos@ey.com Markets Leader Transaction Advisory Services Michael Rogers Global Markets +44 20 7980 0200 michael.rogers@ey.com Transaction Advisory Services Americas Richard M. Jeanneret Americas Leader +1 212 773 2922 richard.jeanneret@ey.com Transaction Advisory Services Europe, Middle East, India and Africa (EMEIA) Joachim Spill EMEIA Leader +49 6196 996 25366 joachim.spill@de.ey.com Transaction Advisory Services Asia-Pacific and Japan John Hope Asia-Pacific Leader +852 2846 9997 john.hope@hk.ey.com Transaction Advisory Services Kenneth G. Smith Japan Leader +81 3 4582 6400 kenneth.smith@jp.ey.com Transaction Advisory ServicesAcknowledgementsOur special thanks go to the Global Capital Confidence Barometer panel* for their contribution to this survey.*  he panel is comprised of EIU senior executives and selected Ernst & Young clients and contacts who participate in the Capital T Confidence Barometer on a biannual basis. The surveys are conducted on an independent basis by the EIU. Global Capital Confidence Barometer 11
  • 12. Ernst & YoungAssurance | Tax | Transactions | AdvisoryAbout Ernst & YoungErnst & Young is a global leader inassurance, tax, transaction and advisoryservices. Worldwide, our 152,000 peopleare united by our shared values and anunwavering commitment to quality.We make a difference by helping our people,our clients and our wider communitiesachieve their potential.Ernst & Young refers to the globalorganization of member firms ofErnst & Young Global Limited, each of whichis a separate legal entity. Ernst & YoungGlobal Limited, a UK company limited byguarantee, does not provide servicesto clients. For more information about ourorganization, please visit www.ey.com.About Ernst & Young’s TransactionAdvisory ServicesHow organizations manage their capitalagenda today will define their competitiveposition tomorrow. We work with ourclients to help them make better andmore informed decisions about howthey strategically manage capital andtransactions in a changing world. Whetheryou’re preserving, optimizing, raisingor investing capital, Ernst & Young’sTransaction Advisory Services bringtogether a unique combination of skills,insight and experience to deliver tailoredadvice attuned to your needs — helping youdrive competitive advantage and increasedshareholder returns through improveddecision-making across all aspects of yourcapital agenda.© 2012 EYGM Limited.All Rights Reserved.EYG no. DE0316This publication contains information in summary formand is therefore intended for general guidance only. It isnot intended to be a substitute for detailed research or theexercise of professional judgment. Neither EYGM Limited norany other member of the global Ernst & Young organizationcan accept any responsibility for loss occasioned to anyperson acting or refraining from action as a result of anymaterial in this publication. On any specific matter, referenceshould be made to the appropriate advisor.The opinions of third parties set out in this publication arenot necessarily the opinions of the global Ernst & Youngorganization or its member firms. Moreover, they should beviewed in the context of the time they were expressed.www.ey.com