Connect with us

Reports

US Dealmaker Optimism Holds Strong as Economic Slowdown Talk Continues

Published

on

The market is entering a new decade on the outer edges of the longest run in M&A history, but even so, dealmakers are largely anticipating stable or increasing levels of activity in the year ahead, according to Deloitte’s “The State of the Deal: M&A Trends 2020” survey of 1,000 U.S. corporate dealmakers and private equity firm professionals.

Nearly two-thirds of respondents (63%) expect deal volume to increase in the next 12 months, despite expectations moderating down 16% from last year; and, just 4% expect a deal volume decline. More than half (56%) expect deal values to increase in the year ahead, moderating down 14% from the year before, but those expecting deal values to stay the same increased to 41% from last year’s 28%.

“Though we’re on the outer edges of one of the most prolific M&A markets in history, M&A remains a strategic growth driver for many organizations. So, I think we’re looking at a leveling of activity in 2020, rather than an M&A boom or bust,” said Russell Thomson, managing partner of Deloitte’s U.S. merger and acquisition services practice. “This could be a good year for companies to focus on the art of transactions, finding ways to add incremental value including exploring pre-deal diligence technologies and engaging increasingly more involved boards to drive accountability and propel deal success.”

Domestic deals on the rise as trade wars impact companies
According to our report, acquisition of foreign targets has decreased since late 2018, with more corporate and private equity investors conducting less deal activity in foreign markets. There was an 8% increase from 2018 in organizations that conduct less than one-quarter of their deals overseas, and a 7% decrease in firms that execute half to three-quarters of their deals internationally.

As domestic deal making increases, a rising number of private equity investors indicate that tariff negotiations have negatively impacted their portfolio companies’ operations (70%, compared to 58% in 2018) and their portfolio companies’ cash flows (70%, up from 55% in 2018).

“Since M&A activity is correlated with GDP, it makes sense that global economic uncertainty — an ongoing obstacle to M&A activity for many companies — is causing a slight retraction in some international deal making,” continued Thomson. “This is less the case for cross-border deals between the U.S. and Europe where there is more visibility into macroeconomic factors at play, relatively predictable tax and favorable import/export regimes, and Brexit impacts may even create buying opportunities.”

M&A expected to accelerate despite ongoing recession risks
As the current bull market and economic expansion extends into record territory and duration, M&A leaders report a positive outlook for deal making despite ongoing recession risks. If an economic downturn occurred in the next 12 months, 42% of respondents said their organizations’ pursuit of acquisitions would increase in the next two years; just 23% said their activity would decrease.

“While an economic downturn will likely impact the frequency and size of transactions, especially megadeals north of $10 billion, many companies will continue to look to M&A as an important lever to maintain a competitive edge and realize strategic goals,” said Thomson.

In the event of an economic downturn, respondents say M&A activity would be driven by their organizations’ interest in maintaining competitive positioning (45%), finding undervalued assets (31%) or seeking inorganic growth (14%).

Divestitures remain popular for corporates
Three-quarters (75%) of corporate dealmakers anticipate pursuing divestitures in the upcoming 12 months, down only slightly from 77% in 2018. Thomson says that the more recent rise in divestiture popularity could accelerate further in the event of a downturn, if companies are facing financial distress. For now, responding corporates’ top three divestiture drivers remained similar to a year ago: change in strategy (17%), financing needs (15%) and divesting incompatible technology (15%).

In private equity, more than half (55%) expect an increase in the number of portfolio exits in the year ahead, driven by fund maturity (42%), fund redemptions (27%) and liquidity for new value opportunities (20%).

Gap widens between valuation and ROI on deals
Despite general optimism for M&A in the year ahead, challenges remain as dealmakers faced diminishing ROI on transactions in recent years. Of all dealmakers, 46% say that less than half of their transactions over the last two years have generated the expected value or return on investment (up from 40% a year ago). Fewer respondents (19%, down from 25% in 2018) indicated that at least three-quarters of their deals measured-up. Digging deeper, only 24% of corporates report having success at deriving expected deal value in 75% to 100% of deals closed in the past two years.

“Despite last year’s efforts to drive deal value via private equity firms’ heightened focus on value creation strategies and corporate dealmakers’ emphasis on post-merger integration plans, the disconnect between valuations and ultimate returns on transactions worsened,” said Thomson. “With no moderation in valuation multiples in sight, it will be important for dealmakers to home in on integration challenges and other areas for value creation in order to help deals hit their ROI thresholds in 2020.”

Continue Reading
Comments

Reports

Critical Reforms Needed to Reduce Inflation and Accelerate the Recovery

Published

on

While the government took measures to protect the economy against a much deeper recession, it would be essential to set policy foundations for a strong recovery, according to the latest World Bank Nigeria Development Update (NDU).

The NDU, titled “Resilience through Reforms”, notes that in 2020 the Nigerian economy experienced a shallower contraction of -1.8% than had been projected at the beginning of the pandemic (-3.2%). Although the economy started to grow again, prices are increasing rapidly, severely impacting Nigerian households. As of April 2021, the inflation rate was the highest in four years. Food prices accounted for over 60% of the total increase in inflation. Rising prices have pushed an estimated 7 million Nigerians below the poverty line in 2020 alone.

The report acknowledges notable government’s policy reforms aimed at mitigating the impact of the crisis and supporting the recovery; including steps taken towards reducing gasoline subsidies and adjusting electricity tariffs towards more cost-reflective levels, both aimed at expanding the fiscal space for pro-poor spending. In addition, the report highlights that both the Federal and State governments cut nonessential spending and redirected resources towards the COVID-19 response. At the same time, public-sector transparency has improved, in particular around the operations of the oil and gas sector.

The report however, notes that despite the more favorable external environment, with recovering oil prices and growth in advanced economies, a failure to sustain and deepen reforms would threaten both macroeconomic sustainability and policy credibility, thereby limiting the government’s ability to address gaps in human and physical capital which is needed to attract private investment.

“Nigeria faces interlinked challenges in relation to inflation, limited job opportunities, and insecurity”, said Shubham Chaudhuri, the World Bank Country Director for Nigeria. ”While the government has made efforts to reduce the effect of these by advancing long-delayed policy reforms, it is clear that these reforms will have to be sustained and deepened for Nigeria to realize its development potential.”

This edition of the Nigeria Development Update proposes near-term policy option organized around three priority objectives:

  • Reduce inflation by implementing policies that support macroeconomic stability, inclusive growth, and job creation;
  • Protect poor households from the impacts of inflation;
  • Facilitate access to financing for small and medium enterprises in key sectors to mitigate the effects of inflation and accelerate the recovery.

“Given the urgency to reduce inflation amidst the pandemic, a policy consensus and expedite reform implementation on exchange-rate management, monetary policy, trade policy, fiscal policy, and social protection would help save lives, protect livelihoods, and ensure a faster and sustained recovery” said Marco Hernandez, the World Bank Lead Economist for Nigeria and co-author of the report.

In addition to assessing Nigeria’s economic situation, this edition of the NDU also discusses how the COVID-19 crisis has affected employment; how inflation is exacerbating poverty in Nigeria; how reforming the power sector can ignite economic growth; and how Nigeria can mobilize revenues in a time of crisis.

Continue Reading

Reports

Indonesia: How to Boost the Economic Recovery

Published

on

jakarta indonesia

Indonesia’s economy is projected to rebound from the 2020 recession with 4.4 percent growth in 2021. The rebound is predicated on the pandemic being contained and the global economy continuing to strengthen, according to the World Bank’s latest Indonesia Economic Prospects report (“Boosting the Recovery”), released today.

The report highlights that although consumption and investment growth were subdued during the first quarter of 2021, consumer sentiment and retail sales started to improve during the second quarter suggesting stronger growth momentum. However, it also notes that pandemic related uncertainty remains elevated due to risks of higher viral transmission.

“Accelerating the vaccine rollout, ensuring adequate testing and other public health measures, and maintaining strong monetary and fiscal support in the near term are essential to boosting Indonesia’s recovery,” said Satu Kahkonen, World Bank Country Director for Indonesia and Timor-Leste. “Parallel reforms to strengthen the investment climate, deepen financial markets, and improve fiscal space for longer-term sustainability and growth will be important to further build consumer and investor confidence.”  

The report recommends the government to develop a well sequenced medium-term fiscal strategy, including clear plans to improve tax revenues and fiscal space for priority spending. It also highlights the importance of maintaining accommodative monetary policy and stimulating private credit to support the real sector while monitoring external and financial vulnerabilities.

The report highlights the critical role of adequate social assistance in mitigating rising poverty risks. It finds that maintaining the 2020 social assistance package in 2021 could potentially keep 4.7 million Indonesians out of poverty.  

This edition of the report also looks at the possibilities for Indonesia to boost higher productivity jobs and women’s economic participation.

“Indonesia has reduced poverty through job creation and rising labor incomes over the past decade. The next stage is to create middle-class jobs that are more productive, earn higher incomes, and provide social benefits,” said Habib Rab, World Bank Lead Economist for Indonesia. “While the crisis risks have exacerbated Indonesia’s employment challenges, it is also an opportunity to address the competitiveness and inclusion bottlenecks to creating middle-class jobs and strengthening women’s participation in the economy.”

The report recommends a four-pronged reform strategy to address these jobs-related challenges:

  • Mitigate employment losses by maintaining adequate job retention programs, social assistance, training, and reskilling programs until the recovery is stronger.
  • Boost productivity and middle-class jobs by promoting competition, investment, and trade.
  • Equip the Indonesian workforce to hold middle-class jobs by investing in education and training systems and programs to improve workers’ skills.
  • Bring more women into the labor force and reduce earning gaps between men and women by investing in child and elderly care and promoting private sector development in the care economy.

The Indonesia Economic Prospects Report is supported by the Australian Department of Foreign Affairs and Trade.

Continue Reading

Reports

Inequality Has Likely Increased in PNG, with Bottom 40% Hit Hardest by Latest Outbreak

Published

on

A joint World Bank and UNICEF report based on mobile phone surveys of Papua New Guinean families has found that while there was a slight recovery in employment between June and December 2020, people in the bottom 40% of wealth distribution remain the hardest hit by the Coronavirus pandemic.

Conducted in December 2020, this second World Bank survey (the first was conducted in June 2020), shows that inequality has likely increased in PNG in the year since the pandemic began, and that the current COVID-19 outbreak is expected to deepen inequalities even further.

“According to the report, there were positive signs that PNG was starting to recover from the initial shocks of the pandemic between June and December 2020,” explained Stefano Mocci, World Bank Country Manager for Papua New Guinea. “However, it was largely wealthier households who were experiencing the fastest recovery in employment and income. In contrast, in areas with above average poverty, there were still high job losses.”

“Given a possible third wave of COVID-19 infections has strong potential to cause further declines in employment and income, social and economic support needs to be targeted to those most vulnerable – the bottom 40% – to try and lessen the widening inequality gap.”

“Little is known about how COVID-19 affects children in PNG,” expressed Judith Bruno, acting UNICEF PNG Representative. “Overwhelmingly, households with children under the age of 15 considered COVID-19 as a major threat to household finances and reported decreases in access to basic services, including water supply, sanitation, health care, and mental health and psychosocial support.”

“This World Bank and UNICEF collaboration will help policy makers and responders to better protect children from the virus, promote safe and continued access to services, and prevent children and their families from further economic hardship.”

Other key findings from the second of five planned World Bank surveys include:

·        For those still working, more than 75% of respondents reported receiving the same income as usual in the past week, compared to less than 50% in June (the strongest gains were for those in the top 40% of wealth distribution);

·        Rural households, and those in the bottom 40% of wealth distribution, were most likely to see decreases in money sent by friends or family.

·        77% of households were somewhat worried, or very worried, about their household finances in the next month.

·        33% of households in the bottom 40% of wealth distribution were unable to buy their preferred protein, compared to just four percent of households in the top 40%.

·        Less than 10% of primary and elementary school students participated in distance learning while schools were closed, but there were no significant differences between boys and girls returning to school and no evidence that the pandemic has widened the education gender gap.

·        Compared to the rest of the country, households in the National Capital District (NCD) were more likely to report deteriorations in theft, alcohol and drug abuse, violence by police and domestic abuse since June 2020 – all indicators of rising tensions in the capital, Port Moresby.

Continue Reading

Publications

Latest

Trending