US Companies are focused on growth over the next 12 months and 41% plan to pursue an acquisition.

Companies will be looking to grow smart, not just grow fast — deal rigor will be essential.

Of the 1,600 companies surveyed world-wide, U.S. executives reported the following:

  • – 52% expect U.S. deal volumes to improve
  • – 48% see the U.S. economy improving
  • – 91% view credit availability as stable or improving

Cash and credit are readily available to support M&A in the United States and corporate America indicates an uptick in desire for dealmaking according to ninth semi-annual Capital Confidence Barometer. Forty-one percent of U.S. executives surveyed expect to pursue an acquisition over the next 12 months, compared with 23% a year ago.  Additionally, 51% of respondents are confident about the likelihood of closing acquisitions over the next year, up from 33% a year ago; 47% are bullish about the quality of acquisition opportunities, compared with 36% a year ago; and 67% are upbeat about the number of acquisition opportunities, up from 40% a year ago. 

However, within U.S. organizations there remains an overarching conservatism, spurred by persistent economic and political uncertainty that has had a powerful effect on the boardroom agenda.

“In order for dealmaking to increase, companies will be looking to grow smart, not just grow fast,” said Richard Jeanneret, Americas Vice Chair, Transaction Advisory Services for the EY organization. “U.S. executives will likely apply the same rigor to dealmaking they have imposed on their own capital structures.

“The stock market rally and the proliferation of credit have affected the M&A environment and valuations continue to be high,” Jeanneret continued. “Companies are evaluating whether big bets will give them better valuations over the long term. Executives can no longer take major risks based on past growth numbers alone; they are increasing their transaction diligence around strategic fit and they are more thoughtful about where to invest. Key operational drivers are crucial and are examined much earlier in the process.”

Improving Economy Does Not Eliminate Uncertainty

Perceptions of the U.S. economy’s future are more positive than they were a year ago, and while confidence in some economic indicators has improved modestly over the past year, the C-suite remains cautious due to short-term fluctuations.  Nearly half (48%) of participants believe the economy is either modestly or strongly improving, compared with 40% a year ago, and 46% think that the economy is stable, compared with 44% last year.  Respondents are more confident in economic growth over the next 12 months than they were last year (76% compared to 41%), and confidence about credit availability has nearly doubled to 55%, up from 28% last year. 

Optimism about global economic indicators is up from last year.  Forty-seven percent of U.S executives are positive about employment growth, up from 30% last year; and 46% feel confident about corporate earnings, compared to 33% last year.

Investment Tops Boardroom Agenda; Focus on Mature Markets and Core Products

Companies have weathered a prolonged period of uncertainty. During this time, they have strengthened their balance sheets and largely optimized their capital structures. Companies continue to focus on improving core products and increasing their presence in existing markets, with 72% of U.S. respondents planning to allocate capital to mature markets. Risk is among a number of factors influencing capital flow decisions, including geographic proximity, existing ties, and receptiveness of local governments and favorable regulatory environment.

Although 61% of respondents say they are intent on investment, companies continue to cite the need for operational efficiency and cost control. Through these optimization efforts, companies have shifted their focus over the past year almost entirely from survival or stabilization mode to growth mode. “Companies will not pursue growth if it will affect the optimization they have already achieved,” Jeanneret commented.

Companies that want to transact are expected to move away from the risk-averse, cash-based deals of the recession period; 49% of companies plan to use debt and equity to finance deals.

Conclusion

Uncertainty surrounding the U.S. budget deficit, tax policy, and the fiscal cliff, as well as the instability caused by the recent government shutdown, are bruising U.S. confidence and creating overhang.  By contrast, Europe has experienced slow growth, but a bottom has been established and there is more clarity about where the economy is headed. 

“Ultimately, the good news for the M&A environment is that the deals that are done will likely be stronger, marked by transaction diligence and improved deal success. For that, we can all be encouraged — even if the long-anticipated return to dealmaking has been slow to arrive,” concluded Jeanneret.

*original post appeared on an M&A forum