Canadian Manufacturing

Defensive cash-accumulation mind-set dominates M&A

Cash-rich companies around the world are reticent to make big acquisitions after four years of a tentative global economic recovery.



LONDON—Cash-rich companies around the world are reticent to make big acquisitions after four years of a tentative global economic recovery, according to a recent survey conducted by Toronto-based think-tank Ernst & Young.

The number of global mergers and acquisitions (M&A) was decimated from the credit crunch and never quite recovered. This lack of bank lending helped along the deepest global recession since World War II.

The uncertainty made companies hoard capital over the past few years. But while they are now rich in cash, they are also wary of spending.

Ernst & Young says M&A is unlikely to pick up much in the next few months in spite of “a more favourable deal-making environment” and less turmoil in the debt markets in the 17-country eurozone.

Its survey of 1,500 senior executives in 50 countries found that only 31 per cent expected to pursue an acquisition over the next 12 months, down from 41 per cent last October. Concerns over global growth continue to dominate sentiment, despite recent improvement in economic indicators.

“Caution rather than confidence is driving global M&A sentiment,” said Pip McCrostie, global head of transactions at Ernst & Young. “With better access to credit and large cash piles, companies have the means and the methods to do deals but their motivation is tempered by concerns over the strength and permanence of the global economic recovery.”

Recent figures from Mergermarket, an observer of M&A activity, show the value of deals in the first quarter of 2012 totalled $181.6 billion, 17.5 per cent lower than the same period the previous year. The first quarter figure was heavily influenced by the $53.5-billion offer for mining company Xstrata PLC by commodities trading house Glencore International PLC. That deal was five times the value of the next highest.

Of those companies considering M&A deals, almost half say they will use cash as their primary source of funding, the Ernst & Young survey showed.

“While the global recovery remains fragile, companies are unwilling to commit the time and resources to M&A and the defensive cash accumulation mind-set will continue to be the norm,” McCrostie said.

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