The number of companies weighing up a takeover or merger worth over $1 billion has more than doubled in the past six months, a new EY study finds, as firms opt for "quality rather than quantity".
More than one in 10 firms plan to make merger and acquisition (M&A) deals over $1 billion, while 27 percent intend to engage in deals worth half a billion dollars, up from 12 percent the year before, EY's Capital confidence barometer showed.
After several years of very low volume and value M&A activity following the 2007-8 financial crisis, 2014 has already seen some big-ticket deals, with Facebook's $16 billion acquisition of WhatsApp at the top. Japanese ecommerce giant Rakuten also said it February that it will buy voice call and messaging app Viber in a $900 million deal.
While almost a third of the 1,600 senior executives surveyed online by EY expect their deal pipeline to increase over the next year, this could see total M&A volumes flat as companies look to make selective acquisitions.
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"Value not volume will be making headlines in the near-future, with prominent large deals part of an emerging trend – in 2014 we have seen a 25 percent increase in deal value but an 11 percent fall in volume globally," Pip McCrostie, EY's global vice-chair of Transaction Advisory Services, said in a press release.
"After a prolonged financial crisis and M&A market malaise, companies and boards are opting for quality rather than quantity."
Debate has been fierce about whether valuations to several deals, particularly whether Facebook overpaid for WhatsApp. But the gap is narrowing between the price companies are willing to pay for an asset and its underlying valuation, according to EY, with half of respondents saying the valuation gap is now less than 10 pecent.
McCrostie said that despite valuations being "favorable" M&A activity is now more "measured".
India and China along with the U.K., U.S., and Germany are the top five investment countries for companies. The largest proportion of acquisition cash is expected to go to the so-called BRIC countries – Brazil, Russia, India and China.
Financial services, oil and gas and technology are among the sectors eyeing up the biggest deals.
But McCrostie warned that expectations about an M&A "boom" need to be tempered.
"The much-anticipated convergence of economic confidence and strong deal fundamentals into notably higher deal volume globally is still not in sight. As we look forward to the future, looking back at the M&A boom years should no longer be the yardstick to compare deal activity – expectations need to be revised down as the deal volume 'norm' is reset lower in this continued slow growth environment," she said.
The survey also revealed that shareholders are becoming increasingly influential and active in business decisions with 93 percent of respondents saying the boardroom agenda is heavily influenced by shareholder pressure. Nearly half of those surveyed expect to pursue cost cutting measures as a result.
"With growth harder to come by in a low-GDP world economy, many executives are adopting a twin-track approach. On the one hand, companies are looking at innovative organic growth strategies – to develop new products and open new markets – and selective but bold inorganic moves in the market. On the other, they are looking at more creative ways to drive down costs," McCrostie said.