Global Capital Confidence Barometer

6th issueOutlook April 2012 – October 2012

In contrast, the number of businesses looking to sell assets has risen by nearly 20% — a clear sign that companies regard portfolio management and a renewed focus on their core business as a priority.

This change in sentiment comes at a time when the fundamentals for M&A are stronger than they have been for some time. Credit constraints are lower and corporate cash balances are high, while confidence is rising following a prolonged period of macroeconomic instability. The valuation gap between buyers and sellers is also narrowing.

So why do we see M&A appetite falling in what should be a positive dealmaking climate?

While corporate executives are in a more confident frame of mind, they are still fundamentally cautious. Persistent market volatility, austerity measures, structural issues (primarily the Eurozone crisis) and potential for slowing growth in emerging markets have continued to dampen the appetite for acquisitions.

For the time being, conservatism among our respondents is dictating M&A sentiment, and buyers are proceeding with caution. However, if key stakeholders exert enough pressure for greater returns, M&A could again rise to the top of the capital agenda.

Pip McCrostie, Global Vice Chair, Transaction Advisory Services

Proceeding with caution?

Our sixth Global Capital Confidence Barometer finds that despite a more favorable deal making environment, leading corporates are not yet convinced to engage in M&A. Only 31% of those surveyed said they expected to pursue an acquisition in the next 12 months — a 24% fall compared with October 2011 and the lowest figure since the barometer began in 2009.

Key findings

• 52% feel the global economy is moderately improving

• Confidence in the local economy triples for the US and doubles for the UK

• M&A appetite down 24%

• Intention to sell up nearly 20%

About this survey

The Global Capital Confidence Barometer is a regular survey of senior executives from large companies around the world, conducted by the Economist Intelligence Unit (EIU). Our panel is comprised of select Ernst & Young clients and contacts, and regular EIU contributors. This snapshot of our findings gauges corporate confidence in the economic outlook, and it identifies boardroom trends and practices in the way companies manage their capital agenda.

Profile of respondents

• Panel of more than 1,500 executives surveyed in February and March 2012

• Companies from 57 countries

• Cross-section of respondents from 40 sectors

• 770 CEO, CFO and other C-level respondents

• More than 400 companies would qualify for the Fortune 500 based on revenues

The Capital Agenda

Based around four dimensions, it helps companies consider their issues and challenges, understand their options and make more informed capital decisions.

1. Preserving capital: reshaping the operational and capital base

2. Optimizing capital: driving cash and working capital and managing the portfolio of assets

3. Raising capital: assessing future capital requirements and assessing funding sources

4. Investing capital: strengthening investment appraisal and transaction execution

Global Capital Confidence Barometer

Conservatism drives M&A outlook down and appetite for divestment up

2 Global Capital Confidence Barometer

Economic outlook

44%

33%

44%

24%

38%

22%

30%

24%

28%

21%

Corporateearnings

Economicgrowth

Employmentgrowth

Creditavailability

Regulatoryenvironment

5%

14%

Short-termmarket

stability

■ Apr-12 ■ Oct-11

% Respondents Positive

7%

3%

45%

23%

28%

37%

18%

32%

2%

5%

Stronglyimproving

Modestlyimproving

Stable

Modestlydeclining

Stronglydeclining

■ Apr-12 ■ Oct-11

What is your perspective on the state of the global economy today?

Please indicate your level of sentiment in the following drivers of confidence at the global level.

Earnings and employment growth fuel confidence

Sentiment around corporate earnings and economic and employment growth underpin a more positive outlook in corporate confidence. In fact, 88% plan to maintain or increase their current workforce in the next 12 months. In addition, respondents indicate credit availability and the regulatory environment are showing modest signs of improvement. Despite these encouraging indicators, respondents continue to think volatility in financial markets poses a concern. Only 5% are confident about the prospects for short-term market stability, compared with 14% six months ago. Successful companies must learn to live with this increased volatility as the “new normal.”

Global economic outlook gains momentum

After a turbulent period in the second half of 2011, the global economy shows some signs of stabilizing. The restructuring of Greek debt has provided some much-needed breathing space in the Eurozone crisis. In the US, a falling unemployment rate, improving credit markets and stronger consumer confidence suggest that a slow recovery is forming. Supported by this more positive outlook and an injection of liquidity from central banks, global equity prices have rallied, and corporate and government bond spreads have narrowed.

Compared with six months ago, when we published our previous Global Capital Confidence Barometer, executives are markedly more optimistic about the economic situation. The percentage of respondents who think the global economy is improving has increased from 26% in October 2011 to 52% in April 2012. The vast majority believe the improvement is modest as opposed to strong. Only 20% are pessimistic about the economy, compared with 37% six months ago.

52% view the global economy as improving, double the 26% seen in October 2011 88% plan to maintain or increase their current

workforce in the next 12 months

What is your perspective on the state of your local economy today?

34%

37%

29%

Oct-11

50%

36%

14%

Apr-12

All

41%

34%

25%

Oct-117%

28%

65%

Apr-12

US

48%

36%

16%

Oct-11

23%

45%

32%

Apr-12

UK

14%

59%

27%

Oct-11

9%

75%

16%

Apr-12

China

18%

21%

61%

Oct-11

29%

24%

47%

Apr-12

India

■ Improving ■ Stable ■ Declining

3Global Capital Confidence Barometer

Confidence shifts from emerging to developed markets

After three years in which corporations viewed emerging markets as the brightest hope for global growth, there are modest signs of a shift in sentiment. The number of respondents who believe the UK economy is improving has more than doubled in the past six months and, in the case of the US economy, almost tripled. By contrast, there is a decline in positive sentiment for both China and India. These key emerging economies are still growing much more quickly than developed markets, but their pace of expansion has slowed. China has suffered from a slowdown in exports to Europe and North America, while India continues to be challenged on a number of fronts.

Viewpoint Austerity mentality takes hold in Eurozone

Companies based in the Eurozone display a more negative sentiment toward their local economies than their counterparts across the globe. Sovereign austerity, combined with a heavy emphasis on corporate cost-cutting, will make economic growth even more difficult in the future.

European respondents will continue to focus on cost-cutting, supply chain rationalization, and the divestment of non-core assets to achieve operational fitness. When asked how they are managing through the Eurozone crisis, 55% of European respondents cited cost reduction as their primary focus, which is a significantly higher rate than the rest of the globe.

Spotlight on China Our sixth Global Capital Confidence Barometer shows a greater focus on stability for Chinese respondents across a number of metrics:

• 75% of Chinese respondents now view their local economy as stable, compared with 59% in October 2011; although those that view their local economy as improving has dropped from 27% to 16%

• Confidence in credit markets also dropped, although the percentage of respondents who view their credit availability as stable has increased by 62%; from 47% to 76%

• While fewer expect to add new jobs, an increased number of Chinese respondents (70%) are aiming to maintain the current size of their workforce, compared with October 2011 (52%)

Given its growth potential relative to developed markets, China is still the most popular choice for those respondents seeking outbound investment opportunities. This interest is led by the US, Australia, Singapore, the UK and Canada.

US local confidence triples; UK local confidence doubles

86% believe the Eurozone crisis has affected their business


Access to capital

Credit conditions improving globally

The Barometer panel believe credit conditions continue to show signs of improvement compared with six months ago.

Please indicate your level of confidence in credit availability at the global level

Global deleveraging trend slows

Many companies have taken advantage of improved credit conditions and a favorable rate environment to strategically use additional leverage and reduce their cost of capital.

61%

51%

Less than25%

75%–100% 25%–49.9% 50%–74.9%

■ Apr-12 ■ Oct-11

27%33%

8%12%

4% 4%

What is your current debt-to-capital ratio?

Countries with the highest debt-to-capital ratios: Italy, the Netherlands, Russia, Singapore, Spain

24%

44%

32%

Oct-11

30%

45%

25%

Apr-12

All

30%

46%

24%

Oct-11

19%

45%

36%

Apr-12

US

41%

46%

13%

Oct-11

39%

38%

23%

Apr-12

UK

31%

47%

22%

Oct-11

14%

76%

10%

Apr-12

China

44%

36%

20%

Oct-11

38%

42%

20%

Apr-12

India

■ Improving ■ Stable ■ Declining

Debt increases as a source of deal financing

While cash is still the primary source of deal financing, the popularity of debt as a funding source is on the rise. Thirty-nine percent of respondents expect to use debt to finance deals, up from 33% six months ago.

Financing deals with cash is often fast and easier but lower rates and better availability of debt financing is likely to encourage corporate acquirers to use more debt.

High levels of liquidity among yield-focused investors have created favorable conditions for corporate debt markets. Companies are no longer looking only to reduce the cost of finance. Now that interest rates have been at historic lows for some time, those benefits have already largely been achieved. Instead, companies are seeking to optimize their capital structures and reduce their overall cost of capital, through rebalancing debt and equity levels; increasing debt maturities; or shifting short-term bank lines of credit to other forms of debt finance, such as private placements.

What is your likely primary source of deal financing in the next 12 months?

18%

39%

43%

■ Cash ■ Equity

■ Debt

75% view credit availability as stable or improving


Growth

Desire for growth continues

Growth continues to remain important to the Barometer panel, with the highest percentage of respondents ever, 52% citing growth as their primary focus. This represents a significant shift in sentiment compared with two years ago, when just 38% of companies listed growth as their top priority.

With US$7.8 trillion of cash on the balance sheets of the Global 1,000*, companies are deciding whether to return this cash to shareholders in the form of dividends or share buybacks, allocate it to value-creating investment opportunities or maintain cash reserves. In general, respondents are more likely to channel their excess cash into organic growth opportunities, rather than return it to shareholders. However, given slow GDP growth across the globe, delivering topline growth will be challenging. Companies must be nimble and flexible to capitalize on growth opportunities, both organic and inorganic.

Which statement best describes your organization’s focus over the next 12 months?

8%

40%

52%

■ Growth

■ Maintain stability

■ Survival

7%

44%

49%

Apr-12Oct-11

Apr-10 Oct-10 Apr-11 Oct-11 Apr-12

38%

46%

51%49%

52%

% focused on growth

*Source: S&P Capital IQ, 11 April 2012

If you have excess cash, which of the following will be your focus over the next 12 months?

50%

49%

18%

22%

16%

15%

11%

10%

5%

4%

Organicgrowth

Paying down debt

Inorganicgrowth

Payingdividends

Buying back stock

■ Apr-12 ■ Oct-11

At what point will shareholders eventually exert pressure on companies to do more with excess cash?


Mergers and acquisitions outlook

Appetite for M&A declines

While most of the ingredients necessary for a deal recovery are now in place — plentiful cash reserves, adequate credit availability and rising economic confidence — the M&A market continues to be restrained by conservatism. Only 31% of respondents stated they plan to pursue acquisitions in the next 12 months, compared with 41% in October 2011 — driven primarily by a reduced appetite to do deals in Europe, Japan and South America.

Where will the deals be done?

The sectors that intend to be most active in acquisitions are financial services, life sciences (including healthcare), consumer products, oil and gas, and technology.

Companies headquartered in India, the UK, the US and Germany are expected to be the most active for M&A.

Given its relative growth potential, China remains the top investment destination, followed by India, the US, Brazil and Indonesia.

On the positive side, M&A fundamentals are becoming more favorable. Respondents believe the number of deal opportunities is increasing and the quality of the potential targets continues to improve. They also say that the likelihood of closing deals is greater than it was six months ago.

Do you expect your company to pursue acquisitions in the next 12 months?

Apr-10

Expectations to pursue an acquisition

Apr-12Oct-11Apr-11Oct-10

57%

41%

38%

41%

31%

Level of confidence at the global level (% positive & stable)

86%

82%

85%

80%

87%

81%

Numberof deals

Qualityof deals

Likelihoodof closing

deals

■ Apr-12 ■ Oct-11

44% of companies with US$5b and greater in revenue expect to pursue acquisitions in the next 12 months

37% of financial services and 33% of consumer products respondents expect to pursue acquisitions in the next 12 months

Top investment destinations

1. China

2. India

3. US

4. Brazil

5. Indonesia


Divesting shifts from contingency to core strategy

By contrast, respondents expect the number of divestments to increase over the next 12 months. The percentage likely to sell assets over this period has risen nearly 20%, from 26% to 31%. A key focus for companies is to streamline their organizations and make decisions about the businesses in which they should be competing. This focus on the core business enhances shareholder value and can provide a way to raise cash in order to compensate for the underperformance of the aggregate business.

Is your company likely to make an asset sale/divestment in the next 12 months?

Apr-10 Apr-12Oct-11Apr-11Oct-10

42%

21%20%

26% 31%

What are the main drivers of your company’s planned divestment activity?

56%

48%

25%

28%

23%

19%

17%

32%

17%

20%

Focus oncore assets

Enhanceshareholder value

Raise cash tocompensate for

underperformanceof aggregate

business

Shedunderperforming

business unit

Fund inorganic/M&A growth plans

■ Apr-12 ■ Oct-11

31% of companies plan to divest assets;the same as those planning to acquire

55% increase in those likely to divest compared to a year ago

Viewpoint Carving out to unlock value

Conservatism, driven by persistent volatility, has caused divesting to move up the corporate agenda. Viewed as a potential safer route to value creation, 31% of our respondents now plan to do a carve-out in the next 12 months. Those planning to divest has increased 55% from a year ago.

Often under pressure from boards, companies are looking carefully at the types of operations they consider to be core. By extracting assets that are not a strategic fit, companies can enhance shareholder value. Those wanting to win the competition for capital will have to exercise more rigor around portfolio optimization. This effort will require companies to develop a more professional approach and focus to the divestment process.

The top countries planning to divest

1. Brazil

2. Japan

3. UK

4. Germany

5. Canada

The top sectors planning to divest

1. Oil and gas

2. Life sciences

3. Consumer products

4. Mining and metals

5. Power and utilities


Survey demographics

What best describes your company ownership?

What is your position in the organization?What are your company’s annual global revenues in US$?

26%

27%

26%

21%Less than $500m

$500m to $999.9m

$1b to $4.9b

$5b or more

49%

30%

21%SVP/VP/director

Head ofBU/dept

C-levelexecutive

48%

39%

6%

4%

3%Private equity

portfolio company

Family-owned

Governmentor state-owned

enterprise

Privately owned

Publicly listed

Proportion of top industries represented

Retail & wholesale

Professional services

Technology

Oil & gas

Life sciences*

* Healthcare/provider care, pharma, biotech

Mining & metals

Power & utilities

Consumer products

Automotive

Financial services

What region is your company based in?

37%

29% 34%

■ Asia–Pacific

■ Americas

■ Europe, Middle East and Africa


Notes


Contacts


If you would like to discuss the comprehensive survey results or those specific to your sector or geography, please contact your Ernst & Young advisor or any of the contacts below.

Name Telephone Email

Global

Pip McCrostieGlobal Vice Chair

Transaction Advisory Services

+44 20 7980 0500 [email protected]

Steven KrouskosGlobal and Americas

Markets Leader



Michael RogersGlobal Markets


+44 20 7980 0200

[email protected]

Americas

Richard M. JeanneretAmericas Leader



Europe, Middle East, India and Africa (EMEIA)

Joachim SpillEMEIA Leader


+49 6196 996 25366 [email protected]

Asia-Pacific and Japan

John HopeAsia-Pacific Leader


+852 2846 9997 [email protected]

Kenneth G. SmithJapan Leader



Acknowledgements

Our special thanks go to the Global Capital Confidence Barometer panel* for their contribution to this survey.

* The panel is comprised of EIU senior executives and selected Ernst & Young clients and contacts who participate in the Capital Confidence Barometer on a biannual basis. The surveys are conducted on an independent basis by the EIU.

Ernst & Young

Assurance | Tax | Transactions | Advisory

© 2012 EYGM Limited. All Rights Reserved.

EYG no. DE0316

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The opinions of third parties set out in this publication are not necessarily the opinions of the global Ernst & Young organization or its member firms. Moreover, they should be viewed in the context of the time they were expressed.

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