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The time is ripe for dealmaking

Global Capital Confidence Barometer | Real Estate, Hospitality & Construction |
16th edition

What a difference six months can make. Since the last EY Global Capital Confidence Barometer, real estate, hospitality and construction (RHC) executives’ outlook on the global economy has improved significantly, rising from 23% of executives who thought the state of the economy was improving in October 2016 to 65% seeing improvement in April 2017. Overall, positive sentiment prevails, despite the high volatility in currencies and commodities, which remain the top economic threat to the RHC sector.

This enthusiastic macroeconomic view has energized dealmaking, with 51% of RHC executives saying that they intend to pursue M&A in the next 12 months, up 10 percentage points from six months ago, and 92% expect the global M&A market to remain stable or improve in the year ahead.

Deal fundamentals mostly support an increased appetite for M&A, but RHC executives worry about the number of opportunities available

Deal fundamentals mostly support this interest in M&A, with RHC executives suggesting that the quality of acquisition opportunities and the likelihood of closing deals are stable or improving (84% and 88%, respectively). However, their enthusiasm is more tempered by the number of acquisition opportunities available, as more than a quarter (27%) express declining confidence, up from only 5% six months ago.

Pipeline numbers seem to reflect this shift in the number of opportunities available, as 28% report having five or more deals on the go, versus 50% in October 2016. However, 41% of RHC executives indicate that they expect their pipelines to increase again in the next 12 months.

Strategic growth tops the agenda as RHC companies look to futureproof their businesses

RHC executives say that the main strategic drivers of pursuing acquisitions are growing market share and moving into new geographies (25% and 22%, respectively). In the search for growth, 42% say they’re looking to futureproof their business in an age of constant change and disruption. When pursuing targets outside of their sector, whether M&As, joint ventures or alliances, RHC executives are looking first and foremost for assets that help with new products or service innovation. RHC companies looking for lower-risk investments are turning to joint ventures or alliances.

Digital technology continues to be a disruptive force. For 16% of executives, the impact of digital technology on their business model features prominently on the boardroom agenda. However, as more than a quarter (26%) of RHC executives can attest, the most difficult part of digital transformation is creating a digital innovation culture.

Stable valuations support increased dealmaking

While about half of the RHC executives in our last three surveys predicted stability going forward for valuations, 38% of RHC executives believe they’re set to rise in the months to come. Investors are more likely to support acquisitions with stable asset pricing. Sellers, meanwhile, are more inclined to bring their assets to market.

Despite a robust appetite for dealmaking, RHC companies are still showing good discipline. Seventy-one percent say they have either failed to complete a deal or canceled an acquisition in the past 12 months. The top two reasons cited are issues uncovered during due diligence or unforeseen tax implications.

Looking ahead

In an era of constant change, RHC companies need to look at all avenues of growth to remain competitive and futureproof their businesses. With favorable economic conditions, the time is ripe for dealmaking in 2017.

EY - Mark Grinis

Mark Grinis

EY Global Real Estate, Hospitality & Construction Leader

+1 212 773 5148