High prices ‘deter mergers and acquisitions’
SOUTH African and global companies’ appetite for mergers and acquisitions has been stunted by the continuing eurozone crisis and slowing economic growth in emerging markets, such as China and India, Ernst & Young said on Thursday.
Merger and acquisition activity in South Africa was this year expected to fall by as much as 40% compared with the same period last year, Brad Webber, co-head of mergers and acquisitions at Standard Bank’s corporate and investment banking unit, told Business Day recently.
Bankers estimate South African companies have cash deposits of over more than R530bn, which they are unwilling to invest because of a lack of confidence in the economy.
In a survey released on Thursday, Ernst & Young said global appetite for acquisitive growth was muted, with companies preferring to sit on their cash, while focusing on cost cutting and operational efficiency.
Pip McCrostie, Ernst & Young global vice chair in the transaction advisory services unit, said in remarks accompanying the survey that the focus in the near term would be mainly on organic growth as the appetite for mergers and acquisitions had declined.
"Despite strong fundamentals for deals, including rising cash stockpiles and adequate credit, there is a lesser appetite for acquisitions and divestments compared with any previous edition of our barometer," she said.
"Contributing to the lack of confidence around (mergers and acquisitions) activity is the sentiment by many executives that acquisition targets are over-priced," said Ms McCrostie.
Companies were now refocusing on the basics, such as cost reduction, performance improvement, capital allocation and targeted organic-and inorganic-growth initiatives.
The survey said only 25% of global respondents expected to pursue acquisitions over the next year, down from 31% in April, and 41% a year ago.
"It is not just a lack of confidence in the business environment that is holding companies back — many are also concerned about the gap between their valuation of potential acquisitions and the prices sought by sellers," said Ernst & Young.
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