SOURCE: The Boston Consulting Group

The Boston Consulting Group

The Boston Consulting Group

November 30, 2010 23:57 ET

European Companies Think the Time Is Right to Acquire Competitors and Expand Into Emerging Markets to Accelerate Growth in 2011

Cautious Optimism Has Returned to the M&A Market as Companies With Record Cash Reserves Seek Growth Opportunities in 2011, According to the Third Annual Survey of European Companies' Deal Plans

LONDON--(Marketwire - November 30, 2010) - Conducted by UBS Investment Bank and The Boston Consulting Group (BCG), the annual CEO/Senior Executive M&A Survey offers unique insights into companies' M&A and restructuring intentions for 2011 and is believed to be the most extensive of its kind. Its findings, drawing on the responses of 179 CEOs and senior managers from publicly listed companies in Europe, are being released today in reports from BCG and UBS.

Key findings include the following:

  • One in six companies is expecting to make a large-scale acquisition in 2011; large companies are twice as likely to do so.

  • One in three companies expects to undertake deal-based restructuring over the next 12 months.

  • Fifty-seven percent see investing in growth via M&A or capital expenditure as the best possible use of their balance sheets, signaling a possible end to the deleveraging wave; only 6 percent prefer share buybacks or increased dividends.

  • One-third believe that the next 12 months is the best time to go ahead with a major deal.

  • Thirty-three percent expect at least one major public offer in their sector.

  • Only 10 percent think that bargains are available.

  • Thirty-nine percent remain skeptical about a recovery in private-equity-led M&A.

  • Of those with M&A plans last year, half canceled; 2010 was a lost year for M&A.

One in six companies (16 percent) intends to make at least one acquisition of a business with sales of more than EUR 500 million in 2011, while larger companies are almost twice as likely to do a deal on this scale. This is close to the level of M&A activity undertaken by European companies in 2005, two years before the peak of the M&A market in 2007.

The survey assessed corporate expectations of public takeover bids and found that one-third of companies expect acquisitions of European public companies during 2011. Within this group, almost half expect two or more bids in their sector.

Thirty-seven percent of companies also believe that the next 12 months is the best time to go ahead with their next significant acquisition. More than half this number think that the next six months is the best time. Their focus is firmly on top-line growth, with the majority of companies looking to use M&A to expand their product offering and one-third looking to access new customers or regions. Fifty-seven percent of companies see investing in growth via M&A or capital expenditure as the best possible use of their cash in 2011.

However, companies' plans reflect a degree of caution. The majority are reluctant to do deals outside their industries, with three-quarters seeing consolidation deals as the most likely type.

An interesting finding, reflecting the deleveraging that has taken place over the last two years and the current attractiveness of debt finance, is that almost 80 percent of companies do not see further debt repayment as their most effective use of cash in 2011. Only 6 percent believe that share buybacks or dividend hikes are the most effective use of their money over the next 12 months.

The majority of corporates do not see the European stock markets as offering acquisition bargains. Still, a large minority (37 percent) consider valuations to be fair or even low.

Most European companies see cross-border M&A as more attractive than domestic deals over the next 12 months, and one in three expects acquisitions to be outside Europe. Two-thirds of companies want to expand into emerging markets in the next 12 months -- and nearly 30 percent of those companies plan to do so through M&A.

"For many companies, 2010 looked in the early months like a lost year for M&A," says Alexander Roos, head of BCG's global M&A practice. "But companies remain cautiously optimistic about deal activity. The lingering uncertainty offers opportunities for those CEOs who are prepared. For example, there are acquisition targets at very attractive prices in some industries. At the same time, firms are refocusing on growth again, especially in emerging markets. Next year's acquisitions -- undertaken with the necessary rigor and with a clear strategy in mind -- can hence become a powerful source of competitive advantage."

"What we're seeing is pretty consistent with early-cycle M&A," says Daniel Stillit, head of special situations research at UBS. "Nearly all the conditions are there for M&A, and the survey suggests a healthy flow of public deals and divisional transactions -- but corporate confidence is critical. The survey suggests that uncertain demand conditions or worries about investor reaction are currently not at the forefront of the corporate mindset, and growth is. This needs to be the status quo for a good pickup in deal activity."

Before making acquisitions, however, many companies plan to restructure their businesses via activities such as disposals, demergers, and IPOs. Two-thirds of companies expect restructuring in 2011 to remain at the same level -- or higher -- as in 2010. This corporate housecleaning releases management resources and can generate cash when balance sheet or credit constraints are still the third-most-cited factor hindering M&A activity. Right-sizing before growing has also been shown to improve the chances of success when making acquisitions.

Although the recovery of M&A seems to be well under way, caution will be the watchword when making acquisitions. Companies are making plans for 2011 as if the M&A market is rebounding, but they are also adapting their growth strategies to counterbalance what could be a lengthy period of low growth in developed countries. And during this time, it will still be possible for companies to do deals that enhance their competitive position.

To receive a copy of the report or arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or gregoire.eric@bcg.com.

About the Survey

The third CEO/Senior Executive M&A Survey was conducted on behalf of UBS and The Boston Consulting Group on a nonattributable basis by GfK Financial, one of the largest market-research companies in the world, between September 8 and October 10, 2010. A total of 179 senior executives from about 780 companies responded, a 26 percent response rate. Responses were segmented across several dimensions:

  • Size by market capitalization: 128 companies below EUR 5 billion, 37 companies above EUR 5 billion but below EUR 20 billion, and 14 companies above EUR 20 billion.

  • Company appetite for M&A: their likelihood of undertaking M&A transactions and deal-based restructuring (such as divestitures, demergers, or IPOs) over the next 12 months.

  • M&A experience involving targets with more than EUR 500 million in sales.

  • Sectors: companies were divided among the sectors shown in the table below.

Aerospace and Defense   Insurance   Property
Banks   Leisure and lodging   Retail
Biotech   Luxury goods   Software/IT services
Building materials   Media   Support services
Chemicals   Mining and steel   Telecom
Construction   Oils   Transport
Food, beverages,
and tobacco
  Oil services   Utilities
Health care   Paper   Other
Industrials   Pharma    

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