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Deal optimism remains despite uncertainty

Capital Confidence Barometer, December 2016 | Real Estate, Hospitality & Construction

Despite political uncertainty, high volatility in currency and commodities and a slowdown in trade flows, almost half (48%) of real estate, hospitality and construction (RHC) executives feel as if the state of the global economy is stable. Yet, there has been a slight uptick in the number of those who perceive it to be in decline.

This slightly tempered view at the macroeconomic level, however, has not dampened dealmaking enthusiasm, as executives are feeling moderately more confident about pursuing M&A than they did six months ago (41% versus 37%) in a market that they increasingly see as stable.

Deal fundamentals support a confident M&A environment

Deal fundamentals seem to support their optimism, with executives feeling slightly more positive or the same about the number and quality of acquisitions and the likelihood of closing as they did in April 2016. At the same time, RHC companies are stuffing their pipelines.

The number of companies with five or more deals on the go has more than doubled in the last six months (50% versus 24%), with 85% expecting their pipelines to either stay the same or increase over the next 12 months.

Innovative start-ups and reacting to customer behavior are top targets

When pursuing deals outside their own sector, 22% of RHC executives indicate that access to differentiated customers, or new product or service innovation, are their number one drivers. However, for 43% of executives, acquiring talent was the second most important reason.

Within the sector, RHC executives are looking for innovative start-ups and deals that help them to react to customer behavior, which was their second most important strategic driver for in-sector dealmaking.
Innovative start-ups may also be looking attractive as a means to address the growing disruption to the core business coming from sector convergence and increased competition from companies in other sectors, as cited by more than a quarter (26%) of RHC executives.

Advances in technology and digitalization is also causing waves that executives are scrambling to address. This would explain why 26% of executives say that identifying opportunities for growth, including M&A, joint ventures and alliances, are top of mind for board members.

Valuations creep higher as the gap between buyer and seller grows

In terms of valuations, quantitative easing continues to put upward pressure on valuations. As central banks shift their asset-buying programs to include corporate bonds and possibly equities, a majority of executives (50%) currently see the valuation gap as somewhat higher (10% to 25%), something 84% expect to remain at current levels or increase in the same timeframe.

Given the growing gap between buyer and seller, it is unsurprising that of the 84% of RHC executives who indicate that they either failed to complete or canceled a deal in the past 12 months, nearly a quarter (23%) cited the gap between buyer and seller expectations as the reason.

Outlook for 2017

As political instability and volatile currencies and commodities continue to threaten core business and M&A strategies, we expect RHC executives will continue to turn to dealmaking to remain competitive in an increasingly disrupted business environment well into 2017.

EY - Howard Roth

Howard Roth

Global Real Estate, Hospitality & Construction Leader

+1 212 773 4910