Digitalization and sector convergence continue to disrupt business models and markets, creating incentive for companies to fuel growth through M&A. According to EY's semiannual Global Capital Confidence Barometer, now in its 15^th edition, an overwhelming majority of US executives (75%) plan to pursue an M&A transaction in the next year. This is the highest percentage ever recorded by The Barometer and well above the long-term average (45%).

New data from this year's Barometer also suggests that US executives are more bullish on domestic M&A. Thirty-two percent (32%) expect that the domestic M&A market will improve in the next 12 months, a three-fold increase from 2015 (10%), while 59% of respondents expect the US M&A market to remain stable. Strong deal pipelines support this outlook, with 90% of US respondents reporting that they currently have one to three deals in process. 

In addition, more than half of US executives (79%) indicated a positive outlook for corporate earnings globally, which suggests that any near term recession concerns may be abating and that  strategic transactions executed over the past several years may now be generating earnings. 

"While the seas have inevitably calmed after 2015, which saw record deal values and the anomaly of massive consolidation in key sectors, executives can't afford to take their foot off the gas as we go into 2017," said Bill Casey, EY Americas Vice Chair, Transaction Advisory Services. "As part of this relative normalization, we are also seeing an evolution toward smaller, tactical acquisitions and expect the combination of slow organic growth and digital disruption to continue to drive adaptive and defensive M&A activity." 

Digitalization and sector convergence disrupting business and driving deals  

Companies are turning to a combination of buying and partnering to accelerate growth and to get ahead of changing industry landscapes. 52% say inorganic strategies are driving growth, including M&A (28%), Joint Ventures (14%) and Alliances (10%). Amid accelerating innovation, these deals can provide a fast, strategic route to growth.

In particular, companies are pursuing cross-sector transactions to remain competitive as advances in technology and digitalization continue to disrupt many business models. US executives cited sector convergence and advances in technology and digitalization among the top disrupters to their core business in the next 12 months, and expect those two issues to drive boardroom strategy discussions in the next six months.

"We're seeing a shift in dealmaking rationales as executives place greater emphasis on strategic growth," said Casey. "Companies are now looking beyond a deal's potential bottom-line earnings and synergies and assessing how each transaction will drive competitive positioning, extend product offerings and differentiation, redefine value propositions or open the door to new markets or industries. Digitalization has become a necessity for corporate survival."

The top three strategic drivers that US executives cited for pursuing an acquisition outside their core sector were access to new materials or technologies, changes in consumer behavior, and product or service innovation. "The changing relationship with consumers will be a key consideration for dealmaking and alliances in the near term," added Casey.

Executives are Disciplined and Discerning in the Face of Uncertainty

With The Barometer recording deal intention at an all-time high, we are also seeing prudent and careful consideration from executives. Nearly all US executives surveyed (95%) have cancelled or failed to complete a transaction in the last 12 months, and the valuation gap between buyers and sellers was the top ranking reason cited for these failed transactions.

The CCB also found that 98% of US respondents are focused on deals under $1 billion, pointing toward an appetite for smaller, more tactical opportunities meant to drive growth through the addition of innovation and talent. 

"This is precision dealmaking," Casey continued. "Companies must pursue opportunities not only to grow, but also to stay relevant in the face of changing consumer preferences, shifting industries and global competition. Pipelines are populated with deals that have transformative potential and are therefore priced at a premium.  Failure to do a key transformative deal in this environment could have negative, long-term consequences for competitive advantage, pushing buyers to bid aggressively for the most coveted deals."

Global Volatility and Instability Threaten Business and M&A Strategy

High volatility in capital markets, global geopolitical instability, and political stability in executives' home country/region were ranked by US executives as the greatest economic risks to both core business and M&A strategy over the next 6-12 months. Slowdown of global trade flows also ranked among the top four risk factors to core business and M&A.

"Strong election rhetoric and concerns over increasing economic and political nationalism have given rise to short-term anxieties around efforts to curb globalization and trade," said Casey. "While these are important considerations, some may be short-lived as we near the upcoming election and we don't expect these factors to dissuade US executives from the transactions that translate into strategic growth opportunities."