Sustained by a strong economic and corporate earnings environment, 73% percent of US executives expect domestic M&A to remain stable over the next 12 months, according to Ernst & Young LLP's twice-annual Capital Confidence Barometer. A majority of US executives are confident that US economic indicators will continue upward, with 63% indicating corporate earnings as improving and 58% indicating the stock market outlook is positive.

Over the next 12 months, 42% of surveyed US executives are planning to pursue a deal—a return to normalized levels from record high deal intentions over the last two years. In the eight-year history of the EY Capital Confidence Barometer, US deal intentions have averaged 52% and ranged as high as 79% and as low as 23%. Large-company M&A is expected to persist: companies with greater than $5 billion in revenue are registering an acquisition appetite of 74%, in line with recent Barometers.

"After the dealmaking boom of the last two to three years, we find executives turning their attention to maximizing the value of recent transactions, while also weighing the uncertainty in Washington on tax reform and deregulation," said Bill Casey, EY Americas Vice Chair, Transaction Advisory Services. "We do not necessarily see this as a long-term shift in dealmaking but rather a potential tactical pause. The M&A market remains full of opportunity, driven by coveted companies weighing profitable exits in light of historically strong valuations. The most nimble dealmakers will move quickly on strategic opportunities that help them grow or protect market share in this highly competitive business landscape."

US corporates placing focus on portfolio and ensuring synergies across assets

"The past two years have seen an aggressive pursuit of deals by companies of all sizes and sectors, naturally leading executives to take stock of newly acquired assets," said Mitch Berlin, EY Americas Operational Transaction Services Leader. "This includes a pivot toward integration and focus on divesting non-core businesses. This is more prevalent than ever with the rise of activists, who are challenging boards and companies to be laser-focused on synergies while shedding assets from both recently acquired companies or their existing portfolio that don't support the go forward strategy."

Companies are also engaging in more frequent portfolio reviews to best position themselves for investments in new technologies. Forty-nine percent of surveyed US executives are saying that they are reviewing their portfolios annually, while another 50% are doing so more frequently. Additionally, as more companies digest previously executed deals, narrative and early integration have become more central to the deal process; 41% of US executives said that ensuring they have a strong narrative to engage all stakeholders is key.

"Forward-thinking companies start their integration strategy early, even as they are formulating initial offers and long before the deal is signed," continued Berlin. "New approaches around big data and analytics can help accelerate that process, leveraging data to test their initial investment thesis. Companies have not been as proactive as they could have been in the last two years and are now leveraging technology to take a surgical, strategic and expedited approach to synergy capture."

Offering quick, inorganic innovation, interest in alliances more than double from one year ago

Companies looking to harness disruption and drive innovation are increasingly turning to alliances, as intentions for these partnerships have more than doubled from a year ago. Thirty-seven percent of surveyed US executives believe disruptive forces, including technology, digital transformation, and sector-blurring, pose some of the greatest risks to the growth of their core business, emphasizing the need for speedy and low-risk solutions.

"The need for growth is not going away for companies in this age of rapid change and innovation," said Casey. "With sustained digital disruption and emerging competition, alliances enable companies to acquire innovative solutions, diversify talent or address new markets without facing the complexities of total integration."

Shareholder activists and private equity continuing to grow in influence, exacerbating competition and high valuations

As US companies face disruption from digital transformation and sector convergence, executives are also facing increasing competition from private equity firms and pressure from shareholder activists. Half see increasing competition for assets, and of those respondents, 49% say it will come from private equity as dry powder remains at record highs.  

According to the Barometer, in addition to the pressures from private equity firms, more than half of US executives (53%) expect the number of companies impacted by shareholder activism to increase. North America is expected to be the key target for activist intervention, with nearly three quarters (74%) of executives expecting to see the greatest increase in shareholder activism in that region.

"We are not surprised that private equity and shareholder activists are of key consideration for US executives, as we have seen them increasingly transform the competitive M&A landscape," said Casey. "With historically high valuations and increased competition for assets, it is vital for US executives to take stock of their strategy, assess their market position and be convincing in their deal narrative when choosing to pursue an acquisition."

US continues to lead as top M&A destination, while China surpasses UK

The US remains the top deal destination for both US and global executives. China has climbed to the number three deal destination for US executives, just behind the US and Canada and surpassing the UK. One year ago, China was not considered a top deal destination, but the Barometer indicates that it is increasing rapidly in appeal for investment opportunities.

"Despite the potential for a tactical pause in US deal activity, we cannot forget that the region remains the most attractive market for investment and M&A," said Bill Casey. "At the same time, we see China evolving as a target for M&A with a rapidly maturing corporate culture driving more varied dealmaking, including an increase in domestic combinations, divestitures and strategic restructuring."