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Cash-rich companies around the world are still reticent to make big acquisitions after four years of low corporate activity as the global economic recovery remains tentative, according to a survey published Monday.
The number of global mergers and acquisitions (M&A) was decimated when the credit crunch started in the summer of 2007, and never quite recovered. As well as trying to cope with a lack of bank lending, companies have had to see through the deepest global recession since World War II as well as acute government spending cuts in Europe.
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.
According to consulting firm Ernst & Young, M&A is unlikely to pick up much in the next few months in spite of "a more favorable deal-making environment" and less turmoil in the debt markets in the 17-country eurozone.
In a survey of 1,500 senior executives in 50 countries, Ernst & Young found that only 31 percent of those surveyed expected to pursue an acquisition over the next 12 months, down from 41 percent last October. It said concerns over global growth continue to dominate sentiment despite some recent improvement in economic indicators, particularly out of the U.S.
"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."
Over recent months, conditions in financial markets have improved compared with the last few months of 2011, when Europe's debt crisis combined with worries over the U.S. economic outlook to knock confidence.
Recent figures from Mergermarket, a close observer of M&A deals, found that the value of deals in the first quarter of 2012 totaled $181.6 billion, 17.5 percent lower than the same period the previous year. The first quarter figure was heavily influenced by the $53.5 billion offer of mining company Xstrata PLC by commodities trading house Glencore International PLC. That deal was five times the value of the next highest.
While the U.S. economic news has, on the whole, been better than expected and growth expectations have been revised up, Europe's debt crisis has eased somewhat this year since Greece clinched its second bailout and the 17 euro countries agreed to forge tougher budget rules.
However, the risks have not gone away, particularly in Europe. In the last couple of weeks, Spain has become the focus of market concerns as investors worry about the new government's ability to push through austerity reforms at a time of recession and record unemployment near 23 percent.
"The relief in the eurozone following the latest Greek debt restructuring and a more positive outlook in the U.S. compared to late 2011 has given large corporates more confidence in the overall health of the global economy," said McCrostie.
"However, with 86 percent of these global companies telling us that the ongoing eurozone crisis has affected their business, the indications are that this could be a fragile recovery in confidence that will be difficult to sustain."
Of those companies that have re-engaged in M&A or are once again considering 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.