october 2015 | 13th edition global capital confidence ... · 13th capital confidence barometer...

October 2015 | 13th edition

Global

Capital Confidence Barometer Real estate, Hospitality & Construction (RHC) Sector

13th Capital Confidence Barometer

About the Barometer

EY’s Capital Confidence Barometer is a regular survey of senior executives from large companies around the world conducted by the Economist Intelligence Unit (EIU).

The respondent community is comprised of an independent EIU panel of senior executives and select EY clients and contacts.

Our 13th Barometer provides a snapshot of our findings, gauges corporate confidence in the economic outlook, and identifies boardroom trends and practices in the way companies manage their Capital Agenda.

EIU panel of more than 1,600 executives surveyed in August and September 2015 | 230 executives

from Real estate, hospitality & construction | Companies from 53 countries | Respondents from 19

industry sectors | 863 CEO, CFO and other C-level executives |

Macroeconomic environment

22%

61%

14%

3%

Apr-15

Strongly improving Modestly improving Stable Modestly declining Strongly declining

12%

41%

44%

3%

Oct-14

36%

47%

9% 7%

1%

Oct-15


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

► While downside risks to the global economy still exist, executives express overwhelming confidence that conditions are improving.

► Having acclimated to the ever-present reality of a low-growth global economic environment, executives maintain an increasingly positive economic outlook across regions and countries for the long term.

Executives show resilience in the face of short-term macro volatility

24%

58%

15%

3%

Apr-15

Strongly improving Modestly improving Stable Modestly declining Strongly declining

11%

29%

57%

3%

Oct-14


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

39%

41%

11%

7%

2%

Oct-15

RHC respondents continue to show confidence in the global economy

RHC respondents

► The number of RHC executives saying the global economy is strongly improving climbed to 39% from just 24% six months ago.

58%

72%

73%

39%

25%

22%

3%

3%

5%

Oct-14

Apr-15

Oct-15

ImprovingStableDeclining

54%

51%

54%

43%

45%

34%

3%

4%

12%

Oct-14

Apr-15

Oct-15

77%

72%

70%

22%

26%

20%

1%

2%

10%

Oct-14

Apr-15

Oct-15


Please indicate your level of confidence in the following at the global level:

64%

69%

71%

32%

27%

19%

4%

4%

10%

Oct-14

Apr-15

Oct-15

Global respondents

Corporate earnings and other leading market indicators remain overwhelmingly positive

► For most companies, 2015 earnings have exceeded analyst expectations, corroborating executive sentiment—given recent currency fluctuations, stability in earnings sentiment is positive overall.

► Looking beyond recent short-term market volatility, executives are taking a more robust view of capital markets. ► Credit availability continues to be boosted by QE in the eurozone and Japan, as well as policy shifts in China.

Corporate earnings Short-term market stability

Equity valuations Credit availability

63%

59%

70%

34%

38%

25%

3%

3%

5%

Oct-14

Apr-15

Oct-15

ImprovingStableDeclining

75%

63%

61%

25%

35%

26%

2%

13%

Oct-14

Apr-15

Oct-15

56%

55%

50%

41%

39%

37%

3%

6%

13%

Oct-14

Apr-15

Oct-15


Please indicate your level of confidence in the following at the global level:

67%

57%

68%

30%

38%

21%

3%

5%

11%

Oct-14

Apr-15

Oct-15

RHC respondents

Leading market indicators are mixed

Corporate earnings Short-term market stability

Equity valuations Credit availability

► RHC executives have less confidence in corporate earnings and equity valuations, while the picture is more mixed for short-term market stability, but positive for credit availability.


What do you believe to be the greatest economic risk to your business over the next 6–12 months?

29%

24%

23%

18%

6%

Increased global and regionalpolitical instability

Increased volatility incommodities and currencies

Economic and political situationin the eurozone

Slowing growth in key emergingmarkets

Timing and pace of interest raterises in the US

29%

25%

22%

20%

4%

Increased global and regionalpolitical instability

Economic and political situationin the eurozone


Slowing growth in key emergingmarkets

Timing and pace of interest raterises in the US

Global respondents RHC respondents

Political instability seen as key economic risk for RHC organizations

► Continuing geopolitical issues in Eastern Europe and the Middle East cause concern around economic risk. ► Concerns around the stability of the eurozone are becoming more prominent. ► Ongoing high volatility in commodities and currencies continues to challenge companies’ long-term planning.

Corporate strategy

20%

26%

32%

9%

8%

5%

23%

15%

24%

13%

11%

14%

Digital future: Technology is disrupting all areas of enterprise, drivingmyriad opportunities and challenges

Entrepreneurship rising: Entrepreneurship around the world isgrowing, driving the need for more supportive ecosystems

Global marketplace: Economic power continues to shift east andsouth, driving new patterns of trade and investment

Health reimagined: Technology and demographics converge to drivea once-in-a-lifetime transformation of health services and provision

Resourceful planet: Growing demand and shifting supply are drivinginnovation in the energy and resources space

Urban world: Effective infrastructure investment and sound planningwill make future cities competitive and resilient

19%

24%

30%

9%

7%

11%

17%

10%

32%

11%

7%

23% Core business

Acquisition strategy


Which of the following will impact your core business and your acquisition strategy most in the next 12 months?

RHC respondents Global respondents

Globalization and digitalization having impact on RHC core and acquisition strategies

► In the near term, the growth in economic influence of Asian economies is expected to have a key impact on RHC core business and acquisition strategies.

► Fueled by the convergence of social, mobile, cloud and big data, and growing demand for anytime–anywhere access, technology will also disrupt both RHC core and acquisition strategies.


Which of the following has been elevated on your boardroom agenda during the past six months?

40%

21%

21%

7%

5%

4%

2%


Reducing costs/improvingmargins

Portfolio analysis, includingstrategic divestment (spin-off/IPO)

Regulatory andcompetition/antitrust oversight

Acquisitions

Cybersecurity

Shareholder activism, includingreturning cash to shareholders

38%

24%

21%

6%

4%

4%

3%


Reducing costs/improvingmargins

Portfolio analysis, includingstrategic divestment (spin-

off/IPO)

Cybersecurity

Acquisitions

Regulatory andcompetition/antitrust oversight

Shareholder activism, includingreturning cash to shareholders


Low-growth, low-inflation environment compelling RHC executives to maintain cost discipline

► Short-term focus on costs is exacerbated by greater currency volatility and fluctuations in commodity pricing. ► Strategic divestment and other portfolio strategies moving higher on the boardroom agenda thanks to ongoing

focus on shareholder activism as well as redeployment of capital in a fast-changing world.

29%

65%

6%

Apr-15

Create jobs/hire talent Keep current workforce size Reduce workforce numbers


With regards to employment, which of the following does your organization expect to do in the next 12 months?

52% 41%

7%

Oct-14

45%

49%

6%

Oct-15

Global respondents

► Positive global economic outlook is driving most companies to retain or grow their workforce. ► Strong US and UK employment growth, and an improving eurozone, validate companies’ drive for talent. ► This Barometer shows corporate emphasis on digital evolution can coexist with positive sentiment on job creation.

Companies remain focused on talent retention, but positive hiring intentions rebound

26%

67%

7%

Apr-15

Create jobs/hire talent Keep current workforce size Reduce workforce numbers


With regards to employment, which of the following does your organization expect to do in the next 12 months?

60%

34%

6%

Oct-14

39%

53%

8%

Oct-15

RHC respondents

RHC executives shift focus back to creating jobs/hiring talent

► RHC executives plan to increase hiring over the next 12 months, while still focusing on retention.


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

49%

31%

33%

35%

54%

56%

15%

14%

11%

1%

1%

Oct-14

Apr-15

Oct-15

Growth Cost reduction and operational efficiency Maintain stability Survival

RHC respondents

44%

37%

29%

41%

49%

60%

15%

14%

11%

Oct-14

Apr-15

Oct-15

Global respondents

Executives focus on operational efficiency driven by consolidating growth gained in prior years

► Clear shift over last two years—from growth to cost reduction and operational efficiency—is likely influenced by RHC companies consolidating prior revenue growth, especially from acquisition.

32%

20%

12%

0%

16%

3%

5%

32%

2%

12%

15%

15%

Increase research anddevelopment/product introductions

Investing in newgeographies/markets

Exploiting technology to developnew markets/products

Changing mix of existing productsand services

Innovative

Oct-15

Oct-14

Oct-13


What is the primary focus of your company’s organic growth over the next 12 months?

23%

6%

23%

14%

40%

17%

More rigorous focus on coreproducts/existing markets

New sales channels

Conventional

32%

25%

14%

0%

22%

8%

3%

30%

6%

16%

12%

9%

Increase research anddevelopment/product

introductionsExploiting technology to

develop newmarkets/products

Investing in newgeographies/markets

Changing mix of existingproducts and services

Innovative

29%

7%

23%

21%

39%

17%

More rigorous focus on coreproducts/existing markets

New sales channels

Conventional


Increased R&D, and more focus on core products/ existing markets are key RHC organic growth routes

► The focus on core operations is still a key driver, while increased R&D/product introductions has become the top focus.


What percentage of available capital will you allocate to each of the following?

30%

28%

27%

15%

Improve the companys balancesheet by reducing debt

Organic growth (e.g., investing inproducts, talent retention,

research and development)

Inorganic growth (e.g.,acquisitions, alliances and JVs)

Returning cash to shareholders

34%

28%

26%

12%

Improve the companys balancesheet by reducing debt

Organic growth (e.g., investingin products, talent retention,research and development)

Inorganic growth (e.g.,acquisitions, alliances and JVs)

Returning cash to shareholders


RHC companies considering the full range of opportunities for allocating available capital

► RHC respondents take a balanced approach to capital allocation.

► Companies with the most active capital allocation processes are consistently shown to outperform those with more passive or infrequent allocation approaches.

56% 27%

17%

Focus on core products/existing markets around efficienciesEvolving core products and servicesEntirely new products and services/true innovation


What percentage of available resources do you plan to spend on each aspect of organic growth over the next 12 months?

57% 26%

17%

Time resources Capital resources Global respondents

Executives consider both core and new elements as they commit resources to organic growth

► By combining the results for evolution in the core and entirely new products and services, we see a balance between resources committed to maintaining core resources (56.5%) and pursuing change (43.5%).

► While new products and services are, as expected, the smallest emphasis, the breakdown here is more tilted toward innovation than the typical “70–20–10” organic growth split—evidence of executives becoming bolder.

56% 28%

16%

Focus on core products/existing markets around efficienciesEvolving core products and servicesEntirely new products and services/true innovation

58% 26%

16%


What percentage of available resources do you plan to spend on each aspect of organic growth over the next 12 months?

RHC respondents

RHC respondents invest in core and new products/services for organic growth

► By combining the results for evolution in the core and entirely new products and services, we see a balance between resources committed to maintaining core resources (57%) and pursuing change (44%).

► While new products and services are, as expected, the smallest emphasis, the breakdown here is more tilted toward innovation than the typical “70–20–10” organic growth split—evidence of executives becoming bolder.

Time resources Capital resources

M&A outlook

Long-term global M&A shows value returns to pre-crisis high, but volume subdued


Source: Dealogic

*2015 M&A extrapolated from January – September 2015 run-rate; 2015 GDP is an estimate

US$m

05,00010,00015,00020,00025,00030,00035,00040,00045,00050,000

0500,000

1,000,0001,500,0002,000,0002,500,0003,000,0003,500,0004,000,0004,500,0005,000,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015*

Value (US$m) Volume

Eurozone Debt Crisis

Global Financial Crisis

► The vast majority of executives predict the global M&A market will thrive in the next 12 months. ► This sentiment is driven by executives’ positive outlook regarding the global economy and their resilience in the

face of a persistently low-growth environment. ► Global M&A is expected to remain firm in the face of short-term market volatility.


0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

5,000,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015*2%

3%

4%

5%

6%

7%

8%

Value (US$m) M&A value as a % of GDP

Strong relationship between M&A and GDP, but current ration shows ample headroom for more deals

Eurozone Debt Crisis

Global Financial Crisis

Source: Dealogic, Oxford Economics 7 EY analysis

2015 M&A extrapolated from January – September 2015 run-rate

► EY analysis shows a strong relationship between M&A values and gross domestic product and finds that there is headroom in this current cycle.

► That is particularly true if the eurozone returns to previous levels of dealmaking and China fulfils its potential. ► Executives are able to see beyond near-term volatility, and this deal market still has some way to run.


What is your expectation for the M&A market in the next 12 months? - Global

83%

15%

2%

60%

39%

1%

69%

26%

5%

Improving

Stable

Declining

77%

19%

4%

51%

47%

2%

72%

25%

3%

Improving

Stable

DecliningOct-15

Oct-14

Oct-13


Continued strength of global M&A underpins increasingly positive deal market sentiment

► Positive market sentiment is accelerating, with a prominent shift from stable to improving in the past six months.

► The vast majority of RHC executives see the global M&A market remaining strong in 2015–16, with increased positive dealmaking sentiment supported by 2015’s heightened M&A activity.


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

57%

69%

76%

37%

46%

69%

44%

51%

58%

Likelihood ofclosing

acquisitions

Quality ofacquisition

opportunities

Number ofacquisition

opportunities

% of positive attitude

55%

66%

70%

40%

43%

63%

50%

58%

62% Oct-15Apr-15Oct-14

RHC respondents Global respondents

35%

31%

40%

56% 59%

32%

33% 35%

50%

43%

Oct-13 Apr-14 Oct-14 Apr-15 Oct-15

Expectations to pursue an acquisition


While deal fundamentals have improved, the expectation of pursuing acquisitions has fallen

► Plans to pursue acquisitions have decreased for RHC respondents after a strong increase six months ago. ► Deal fundamentals are up across the board, with particularly strong increases in likelihood of closing deals and

quality of opportunities.


What is your largest planned deal size in the next 12 months?

5%

14%

81%

2%

21%

77%

3% 26%

71%

Greater than US$1b US$251m – US$1b US$0 – US$250m

Oct-15

Oct-14

Apr-15

*based on Dealogic data January to September vs. January to September 14

7%

15%

78%

3%

11%

86%

4% 18%

78%


Oct-15

Apr-15

Oct-14

Upper–middle market deal plans increase

► While the majority of RHC investments are expected in the lower middle market, expected deal sizes are growing.

► Upper-middle-market deals—between US$250m and US$1b—now makes up nearly one-fifth of planned RHC M&A.

77%

16%

7%

Bolt-on (complement current business model)Innovative investment (shifts scope of your business – could be into another industry sector) Transformative (high value acquisition which significantly changes the size and scale of your company)


Your planned M&A activity will mostly be:

82%

11%

7%


Executives swing toward bolt-on acquisitions as companies consolidate to secure market share

► RHC executives are using bolt-on acquisitions to control costs and improve efficiencies.

26%

30%

13%

8%

23%

28%

38%

16%

7%

11%

12%

33%

30%

13%

12%

1

2

3

4

>=5

Oct-15Apr-15Oct-14


How many deals of all sizes do you have in your pipeline today?


35%

22%

14%

4%

25%

42%

26%

13%

5%

14%

10%

33%

31%

6%

20%

1

2

3

4

>=5

Growth in RHC deal pipeline size corresponds with improved dealmaking sentiment

► There has been a movement to larger RHC deal pipeline sizes: Having two to five deals are all up from six months ago, and two and three-deal pipelines are up strongly from a year ago.

► Looking ahead, a majority of executives expect no change in deal pipelines, likely due to already-robust pipeline activity.


How do you expect your deal pipeline to change over the next 12 months?

66%

44%

35%

29%

23%

63%

5%

33%

2%

Oct-14

Apr-15

Oct-15

Increase No change Decrease

74%

31%

36%

23%

26%

60%

3%

43%

4%

Oct-14

Apr-15

Oct-15


► A solid majority (60%) of RHC executives expect no change in their deal pipelines. This is an enormous change from six months ago.

► Only 4% of executives see a decrease in their pipeline over the next 12 months, down from 43% six months ago.

More RHC executives expect no change in the size of their deal pipelines

56%

23%

5%

7%

9%

48%

28%

3%

6%

15%

1

2

3

4

>=5

Oct-15Apr-15

43%

36%

10%

4%

7%

52%

25%

11%

5%

7%

1

2

3

4

>=5

Respondents expect to complete a similar amount or more deals than a year ago


How many acquisitions do you expect to complete in the next 12 months?


► RHC dealmakers who are planning to complete five or more deals in the next 12 months are accelerating their activity.

47%

50%

3% 27%

69%

4%

More The same Less

54% 41%

5% 31%

64%

5%

Executives expect to complete a similar amount or more deals than a year ago


Is this more or less than the number of acquisitions you completed in the prior 12 months?

Apr-15

Oct-15 Oct-15

Apr-15


► A majority of RHC executives expect M&A will continue at a similar level for most dealmakers.

6%

53%

39%

2%

15%

49%

35%

1%

Significantly higher (25% or more) Somewhat higher (10%-25% gap) The gap is small (<10%) No gap

7%

50%

42%

1%

18%

42%

39%

1%


How do you think that buyers’ expectations currently compare to seller’s (valuation gap)?

Apr-15

Oct-15


Oct-15

Apr-15

Manageable RHC valuation gap supports continued dealmaking

► 40% of RHC executives say the valuation gap is less than 10%. ► While currently high valuations may deter some dealmaking, overall view of stability should offset downside risk.

18%

78%

4% 35%

61%

4%

Widen Stay the same Contract

19%

78%

3% 34%

61%

5%


Do you expect the valuation gap between buyers and sellers in the next 12 months to:

Apr-15

Oct-15


Oct-15

Apr-15

A majority sees the valuation gap staying the same, while a growing number say it will widen

► The number of RHC executives who say that the valuation gap will widen increased from to 34% from 19% in the last six months.

17%

78%

5%

39%

56%

5%

Increase Remain at current levels Decrease

17%

78%

5%

40%

56%

4%


What do you expect the price/valuation of assets to do over the next 12 months?

Apr-15

Oct-15


Oct-15

Apr-15

More respondents see the price/valuation of assets increasing

► The number of RHC respondents saying that the price/valuation gap of assets will increase over the next 12 months rose to 40% from 17% six months ago.


What are the main drivers affecting your M&A strategy over the next 12 months?

32%

19%

14%

10%

9%

9%

7%

Gain market share in existinggeographical markets

Improve structural taxefficiencies

Move into newproduct/services areas

Move into new geographicalmarkets

Acquire talent

Access newtechnology/intellectual

property

Reduce costs, improvemargins

32%

21%

13%

10%

9%

9%

6%

Gain market share inexisting geographical

markets

Improve structural taxefficiencies

Acquire talent

Move into newproduct/services areas

Move into new geographicalmarkets

Reduce costs, improvemargins

Access newtechnology/intellectual

property


Gaining market share in existing markets is key driver of M&A strategy

► Gaining market share in existing geographical markets and improving structural tax efficiencies are by far the two largest drivers of RHC M&A strategy.

21%

19%

16%

15%

11%

11%

5%

2%

Buyer competition (including valuation gap betweenbuyers and sellers)

Adverse political environment

Adverse economic environment

Deal execution and integration capabilities (includinglack of internal resources/managerial focus)

Insufficient opportunities/suitable targets

Funding availability

Regulatory or antitrust environment

Uncertain tax environment

34%

16%

10%

11%

12%

13%

3%

1%


What are the main challenges to your M&A strategy over the next 12 months? Global respondents RHC respondents

A wide range of factors challenges RHC M&A strategy

► Buyer competition has become the primary challenge to RHC M&A strategy, followed by an adverse political environment, funding availability, insufficient opportunities and deal execution and integration capabilities.


If you have either failed to complete or canceled a planned acquisition in the past 12 months, what was the primary reason?

73%

27%

We have canceled or failed tocomplete a planned acquisition

We have not canceled or failed tocomplete a planned acquisition

33%

29%

21%

12%

5%

Competition from otherbuyers

Concerns aboutregulatory or antitrust

reviews

Gap between buyerand seller expectations

too wide

Investor or boardscrutiny

Issues uncoveredduring due diligence

Global respondents

Executives’ willingness to walk away from deals underscores overall health of M&A market

► The high number of failed or pulled deals, coupled with fuller pipelines, is evidence of an M&A market in which companies evaluate deals carefully and are willing to walk away.

► While buyer competition is the top cause of failed or pulled M&A, concern over regulatory or antitrust authorities ranks a close second.


If you have either failed to complete or canceled a planned acquisition in the past 12 months, what was the primary reason?

75%

25%

We have canceled or failed tocomplete a planned acquisition

We have not canceled or failedto complete a planned

acquisition

37%

28%

21%

9%

5%

Competition from otherbuyers

Concerns about regulatoryor antitrust reviews

Gap between buyer andseller expectations too

wide

Investor or board scrutiny

Issues uncovered duringdue diligence

RHC respondents

The willingness of RHC executives to walk away from deals, shows a healthy M&A market

► This is an M&A market in which companies are evaluating deals carefully.

► While buyer competition is the top cause of failed or pulled M&A, concern over regulatory or antitrust authorities ranks a close second.


If you are planning an acquisition in a sector other than your own, please indicate which sector?

48%

52%

I am planning anacquisition outside of

my own sector

I am not planning anacquisition outside of

my own sector

I am not planning an acquisition outside of my own sector, 52%

I am planning to do an acquisition outside of my own sector, 48%

Manufacturing, 9% Retail & wholesale, 6% Government & public sector, 4% Logistics & distribution, 4% IT hardware and software, 3% Technology, 3% Construction, 2% Healthcare/provider care, 2% Hospitality & leisure, 2% Other transportation (incl. rail & truck), 2% Planning acqusition in other sectors, 11%

Convergence and blurring of sectors spurring companies to consider cross-sector M&A

► Companies considering an acquisition outside of their sector may also be evaluating deals within their sector.

► Disruptive megatrends are blurring traditional boundaries between sectors, particularly around technology and industrial processes.

Global respondents


If you are planning an acquisition in a sector other than your own, please indicate which sector?

I am not planning an acquisition outside of my own sector, 48%

I am planning to do an acquisition outside of my own sector, 52%

Construction, 14% Real estate, 14% Hospitality & leisure, 9% IT hardware and software, 2% Other transportation (incl. rail & truck), 2% Power & Utilities, 2% Consumer goods, 1% Diversified industrial products, 1% Financial Services, 1% Government & public sector, 1% Planning acqusition in other sectors, 5%

RHC respondents

More than half of RHC companies are planning an acquisition outside their sector

52%

48%

I am planning anacquisition outside of

my own sector

I am not planning anacquisition outside of

my own sector

► RHC companies are looking to construction (14%), real estate (14%) and hospitality & leisure (9%).

Poor operating cost assumptions is major roadblock to deal success


For acquisitions completed recently, what was the most significant issue that contributed to deals not meeting expectations?

21%

21%

17%

15%

12%

11%

3%

Poor operating costassumptions

Poor execution of integration

Product/sales price andmargin deterioration

Failure to achieve synergies

Sales volume declines/Loss ofcustomers

Strategic valueoverestimated/purchase price

multiple too high

Unforeseen liabilities (tax, HR,pension etc. )

21%

18%

17%

14%

13%

13%

4%

Poor operating cost assumptions

Poor execution of integration

Product/sales price and margindeterioration

Failure to achieve synergies

Strategic valueoverestimated/purchase price…

Sales volume declines/Loss ofcustomers

Unforeseen liabilities (tax, HR,pension etc. )


► For RHC executives, a wide range of factors impacted their recently completed deals not meeting expectations. These were led by poor operating cost assumptions, poor execution of integration and product/sales price and margin deterioration.

Aerospace and defense

Automotive and transportation

Banking and capital markets

Consumer products and retail Diversified industrial

products

Govt, public sector Insurance

Life sciences Media and

entertainment Mining and metals

Oil and gas

Other sectors

Power and utilities

Provider care

Real estate

Technology

Telecommunications

Wealth and asset management

Global M&A — relative performance by sector


(LTM to September 2015)

HIGH VOLUME

HIGH VALUE

LOW VALUE

LOW VOLUME Few deals, high value

Many deals, moderate value Many deals, low value

Few deals, low value Source: Dealogic

Excludes real estate asset acquisitions


What is the main strategic driver for pursuing an acquisition outside your own sector?

36%

29%

17%

15%

3%

Access to new materials orproduction technologies

Changes in customer behavior

Reacting to competition

New product innovation

Technology and digitalization

35%

25%

20%

16%

4%

Access to new materials orproduction technologies

Reacting to competition

Changes in customer behavior

New product innovation

Technology and digitalization


Range of drivers causing RHC respondents to pursue acquisitions outside of their own sector

► Access to new materials or production technologies is the main driver causing RHC executives to pursue an acquisition outside their sector.

► Changes in customer behavior and similar moves by competition are also changing competitive dynamics.

26%

19%

16%

14%

12%

11%

2%

Increasing globalization

Sector convergence/increase competitionfrom companies in other sectors

Changing customer behavior andexpectations

Industry regulation

Advances in technology and digitalization

Product innovation

Other

21%

20%

16%

16%

14%

12%

1%

Increasing globalization

Industry regulation

Sector convergence/increase competitionfrom companies in other sectors

Changing customer behavior andexpectations

Product innovation

Advances in technology and digitalization

Other


From where do you see the most disruption to your core business in the next 12 months? Global respondents RHC respondents

Among disruptive core-business challenges, globalization poses greatest risk

► The lack of an outstanding single disruptive force points to myriad challenges buffeting RHC businesses.

► While, individually, digitalization and product innovation are seen as somewhat smaller challenges, together they total 23%—in other words, nearly a quarter of respondents see technological forces affecting core business.

41%

29%

30%

Outside domestic market/immediate region Immediate region (countries close to home) Domestic market (home country)


Where is the main focus of your M&A strategy over the next year?

27%

44%

29%


Amid increased globalization, companies are considering all locales for acquisition targets

► More than a quarter of RHC companies are looking outside of their domestic market / immediate region.

RHC companies taking advantage of attractive asset pricing in emerging markets


► 29% of RHC respondents plan to allocate at least 10% of their acquisition capital to emerging markets—up 9 points from six months ago.

► Recent currency swings against emerging markets have made assets more attractive in some markets.

What percentage of your acquisition capital are you going to allocate to the emerging markets in the next 12 months?

3%

9%

29%

53%

6%

3%

1%

31%

61%

4%

Above 50%

25%-50%

10%-25%

Less than 10%

None

2%

6%

21%

61%

10%

2%

1%

17%

69%

11%

Above 50%

25%-50%

10%-25%

Less than 10%

None

Oct-15Apr-15



Which are the top destinations your company is most likely to invest in the next 12 months?

Global RHC

Top destinations

Top 5 destination countries

US USUK ChinaChina AustraliaIndia UKGermany Canada

RHC respondents most likely to invest in the US in the next 12 months

► China is the only developing nation to be included in the RHC top 5 investment destinations.

US China

Australia

UK Canada

26%

63%

5% 6%

Increased Stayed the same Decreased Not relevant/ no plans to invest in eurozone

18%

65%

8%

9%


Has your intention to acquire assets in the Eurozone altered due to recent political events and changes in monetary and economic policy?


Eurozone investment appetite stable, and in some cases increased

► Nearly a fifth of RHC executives have increased plans to acquire assets in the eurozone, while a strong majority (65%) has no intention to alter their acquisition plans there.

Within the deal process, digital technology has had greatest impact on post-merger integration


What part of your deal process has been most affected by advances in digital technology?

40%

34%

17%

9%

Post-merger integration

Due diligence (includinganalytics, big data, digital

and social media diligence)

Sourcing and selectingopportunities

There has been no impact

44%

28%

17%

11%

Post-merger integration

Due diligence (includinganalytics, big data, digital

and social media diligence)

Sourcing and selectingopportunities

There has been no impact


► More than ever, digital technology influences what RHC companies acquire, how they integrate, and how they monitor and measure success.

53%

34%

13%

50%

42%

8%

High Medium Low


What is your assessment of the current risk of a potential cyber attack/breach of your deal process?


The vast majority of executives see measurable deal process risk from cyber-attack…

► 87% of RHC executives view cybersecurity as a significant risk—medium or high—to their deal process.

► Heightened media attention and increased corporate awareness of cyber-risk are contributing to watchfulness at the C-suite/Board level.


Do you perform cybersecurity due diligence on your transactions?

56% 38%

3%

3%

Always Sometimes Don’t know Never

59%

32%

2% 7%


…and a majority perform cybersecurity due diligence as a matter of course

► Cybersecurity involves not only the deal process but also the target itself—and corporate vigilance is increasing, end to end.

► More than half of RHC companies regard cybersecurity as a core part of the due diligence process.


If so, at what time in the process is the due diligence performed?


49%

46%

5%

Between signing and closing As part of the core diligence process Just prior to announcement

54% 43%

3%

…and a majority perform cybersecurity due diligence as a matter of course

► 43% of RHC executives said they perform cybersecurity due diligence as part of the core diligence process.


If so, what type of due diligence is performed?


77%

75%

68%

64%

IT systems

Customersagreements/ system

interfaces

JV/affiliates

Supply chainagreements/ system

interfaces

83%

77%

67%

62%

IT systems

Customersagreements/ system

interfaces

Supply chainagreements/ system

interfaces

JV/affiliates

Due diligence widely performed over a number of areas

► More than three-quarters of RHC respondents performed cybersecurity due diligence on both IT systems and on customers agreements / system interfaces.

Survey demographics

Publicly listed 65% Privately owned 31%

Government/state-owned enterprise 2%

Family-owned 2%

26%

11%

24%

25%

14%

$5bn or more

$3bn to $5bn

$1bn to $3bn

$500m to $1bn

$250m to $500m

Survey demographics


What are your company’s annual global revenues in US$?

What is your position in the organization?

What best describes your company ownership?

C-level executive

52%

SVP/VP/ Director

33%

Head of BU/dept.

15%

Global respondents

Privately owned 49% Publicly listed 47%

Family-owned 3%

Government/state-owned enterprise 1%

Survey demographics


What are your company’s annual global revenues in US$?

What is your position in the organization?

What best describes your company ownership?

C-level executive

57% SVP/VP/ Director

27%

Head of BU/dept.

16%

7%

7%

22%

27%

37%

$5b or more

$3bn to $5bn

$1bn to $3bn

$500m to $1bn

$250m to $500m

RHC respondents

EY | Assurance | Tax | Transactions | Advisory

About EY

EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.

About EY’s Global Real Estate, Hospitality & Construction (RHC) sector

Today’s RHC sector must adopt new approaches to address regulatory requirements and financial risks, while meeting the challenges of expanding globally and achieving sustainable growth. EY’s Global RHC sector brings together a worldwide team of professionals to help you succeed — a team with deep technical experience in providing assurance, tax, transaction and advisory services. The sector works to anticipate market trends, identify the implications and develop points of view on relevant sector issues. Ultimately it enables us to help you meet your goals and compete more effectively.

2015 EYGM Limited.

All Rights Reserved.

ED None

This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.

ey.com/rhc

october 2015 | 13th edition global capital confidence ... · 13th capital confidence barometer...

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