Merger Fever’s Testy Temperature Reading

The latest edition of auditing and consulting firm Ernst and Young’s global capital confidence barometer, surveying thousands of senior executives in forty countries across fifteen industries, was upbeat on global economy and M&A prospects despite geopolitical jitters. It found that digital and supply chain evolution, aided by private equity again on the hunt, continue to propel deals. The worldwide rise in purchasing manager indices has translated into “stretched” earnings expectations that drive buying interest beyond internal growth. Short-term credit and securities markets are stable and improving to support higher valuations, although currency and commodity volatility lingers, according to the poll. Policy uncertainty by geography—US, EU and China—and issues including cyber war, trade protectionism and immigration affect the business model but Eurozone breakup and Chinese debt crisis are low-risk probabilities. Technology disruption may be the leading factor in strategy and tactics, with traditional complications like tax rates and government intervention losing sway. It has resulted in global outsourcing of information and finance functions so companies focus on “core competence,” itself a moving target with increased automation and innovation. Acquisition pace may not return to 2015’s record and will spike this year but not overheat, with over half of respondents on the trail. They are following customers and trying to retain competitive edge, and also looking to simpler relationships like alliances and joint ventures. Methods range from full asset purchase to investment through corporate venture capital units, and high-profile bids will attract scrutiny from activist shareholders. In the US and Europe sentiment is split as the business-friendly Trump administration has triggered optimism, while UK-EU negotiations over Brexit prompt a wait and see stance. China is the number two M&A destination, and this year’s trend toward domestic combinations and inward allocation is opposite 2016’s. State enterprise consolidation in excess capacity sectors like aluminum and steel, along with consumer play shifts in the economic model, will be major themes, the study believes. Brazil and India are also in the top ten countries, and autos, energy, mining and telecoms are the main categories on the radar.

Brazil’s FDI is on solid course as portfolio inflows lift stocks and bonds and chase a raft of initial public offerings such as airline Azul after a long pause. Recession is over and inflation is heading toward 5 percent as the central bank may slide the benchmark rate to single digits. According to regulators banks are in decent shape to tackle corporate bad loan damage, while consumer borrowing appetite is frozen as reflected in flat to negative retail sales. The interim government has proposed aggressive pension reform to accompany long-term spending restraint, but Congress may dilute the package to modest changes phased in over time extending fiscal deficit positions. In the House 60 percent of lawmakers must approve before the bill goes to the Senate, and party discipline has fractured with President Temer’s popularity at a nadir under the weight of overlapping scandals. Top officials at the IMF-World Bank spring meetings assured investors that this social security overhaul attempt would not meet the fate of the previous two decades ago which failed by one vote, but political drama could again doom it if early presidential elections are called due to resignation or popular demand which in limited quarters has repositioned disgraced former President Lula on the stage.

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