US executives see increasing M&A opportunities as economic prospects take a positive turn, but they consider domestic policy uncertainty a top disruptor to their businesses. According to EY's semiannual Global Capital Confidence Barometer, now in its 16th edition, 79% of US executives expect to actively pursue M&A in the next 12 months, well above the long-term average (47%) and 22 percentage points higher than a year ago.

US executives are becoming increasingly optimistic about the M&A market as companies look to grow market share: 58% see the US economy as improving over the next 12 months, up from 4% a year ago. This is reflected in respondents' strong and stable transaction pipelines — the vast majority (93%) of executives say they have one to three deals in process.

"We are facing the most complex macroeconomic environment in recent memory — but despite the complexities, executives don't have the option to wait and see," said William M. Casey, EY Americas Vice Chair, Transaction Advisory Services. "They must be cognizant of potential uncertainties, while actively maintaining their search for strategic opportunities to drive growth. The risk of being left behind is far too great to ignore — so the deals continue."

The Trump Administration's First 100 days: An M&A Boon Despite Uncertainty

Already in 2017, the US has seen the second highest first-quarter deal activity in a decade (US$366 billion), up 22% from 2016. Market observers have attributed strong M&A and equity-market activity to the Trump Administration's pro-business orientation, and Barometer respondents echo this sentiment: More than half (54%) of US executives think the new administration is creating more M&A opportunities. However, these respondents also confirm that domestic policy is having a direct and immediate impact on US businesses' risk profiles and strategies.

Of the new administration's proposed policies, US executives are watching developments around corporate tax reform most closely. Nearly half (46%) are factoring potential revision of the US corporate tax code into M&A strategies. While the repatriation of overseas cash could spur further dealmaking, it is not viewed as essential, as executives are already emboldened by positive economic indicators and their own well-capitalized balance sheets.

US executives also cited cross-border dealmaking as a key consideration as companies look to secure market access and supply chains. However, US respondents are primarily prioritizing deals domestically and in Canada. Interestingly, India, which did not even rank among US executives' top five investment destinations just six months ago, has emerged as the third–most popular in this survey.

"As debates in Washington continue to dominate headlines, companies are compelled to proactively assess their strategies and adjust to unfamiliar risks, challenges and opportunities," Casey continued. "Concern about government intervention in business is top-of-mind for executives, as potential barriers to a more globalized business environment leave companies with more questions than answers. At the same time, the possibility of tax reform on the table gives executives an opportunity to begin preparing for larger-scale transactions."

Executives Prudent as Disruptive Forces Continue; International Concerns Subside

While US executives are closely monitoring domestic economic and political developments, global events are having a more limited impact: 79% of executives say greater clarity around the European Union's "Brexit" negotiations has had no impact on their likelihood of investing in the United Kingdom. Similarly, the growth of populist political movements across the EU did not register as a top concern, with 85% of US executives saying EU politics has not affected their strategy in the region.

On the other hand, shareholder activism and the prospect of competitors acquiring innovative startups are more central strategy considerations. An overwhelming 89% of executives are increasing the frequency of their portfolio review processes to ensure they are best positioned to capitalize on disruption within their sectors.

"Disruptive forces — technology, politics, activist shareholders — generate conflicting priorities for corporations," said Casey. "This is why the modern enterprise needs to monitor the macro conversation, to listen to the market, more than ever, repositioning for a more volatile trajectory."

Despite their robust M&A intentions, US executives remain cautious in their deal pursuits. More than three-quarters (76%) say they have canceled or failed to complete a transaction in the past 12 months. The top reason for canceling a deal was cyber security, followed closely by issues uncovered during due diligence and economic and political instability.

"While uncertainty can create risk, so does uninformed action," Casey noted. "We are seeing buyers conduct more robust diligence as one way to guard against disruption. This is especially critical on the commercial side, where cutting-edge technology can uncover game-changing insights that may not yet be reflected in balance sheets and financial statements."

Tactical Deals Remain Priority for US Executives

At the start of 2017, EY dubbed it as the year of the "Genetically Modified Organization," highlighting companies' growing interest in more tactical, surgical dealmaking. The latest Barometer reflects this trend, as 75% of US executives say they are targeting deals under $250 million — the kinds of acquisitions that can alter corporate DNA and enable reinvention amidst pervasive technological disruption.

"Many of the deals we are seeing lately are small but powerful," said Casey. "They deliver high-impact, transformational change to companies seeking innovation and growth. As disruptive events occur globally, one thing remains consistent: executives are resolved to battle uncertainty with bold action in the name of enduring relevance and future prosperity. This, we are confident, is evidence of a resilient deal market in the near term."