DETROIT—As the U.S. economy improved, so has the business confidence of auto industry execs, according to a recent study.
Ernst & Young L.L.P.'s seventh Capital Confidence Barometer for the automotive industry shows that executives are the most optimistic about growth, earnings and credit availability they have been in the past two years. For many companies, that means mergers and acquisitions are likely to happen in the near future.
"We're pretty enthusiastic about our respondents' view of the global marketplace," Jim Carter, Ernst & Young's Americas automotive industry leader for transaction advisory services, said. "We think they're pretty poised for growth…they're looking ahead and not behind."
In the survey—which was taken in April and is recorded twice a year—33 percent of executives said they expect to pursue an acquisition in the next 12 months, up from 19 percent in October 2012. The lion's share of respondents, 77 percent, said they expect the value of future merger and acquisition deals to be in excess of $50 million. That's up significantly from 48 percent six months ago.
With significant amounts of debt paid off and the increased availability of capital, Carter said more companies have the capacity to do larger transactions. However, he continues to believe that most of the deals will be middle-market, niche-oriented, customer-based acquisitions.
"Companies are going to look to buy new technology, they are going to want things that are product-focused, technology-focused to add to their portfolios, and I think those companies are the companies that are responding, that have this increased appetite to do (mergers and acquisitions)," Carter said.
Despite the optimism for increased merger and acquisition activity, the study notes that only 14 percent of respondents said they expect to pursue divestments in the next 12 months, compared with 25 percent when that number peaked a year ago. This suggests there are more buyers than sellers in the market. Carter said this is likely a temporary gap, greater demand for acquisitions will likely drive companies to sell.
Companies are also much more optimistic about the valuations of those acquisitions: Only 4 percent of respondents think valuations will decline, down significantly from 30 percent in October 2012. More respondents, about 57 percent, think valuations will stay the same, while 39 percent believe values will increase.
Outlook good, growth expected
Respondents were overall more optimistic about the global economy. The survey said 52 percent believe it is improving, 40 percent believe it is stable and only 8 percent believe it is declining.
As the job market improves, few executives said they expect to reduce their workforce numbers. Roughly equal amounts said they expect to either create or maintain their workforce size.
As mentioned, much of the positive outlook comes from improved credit availability: 54 percent of respondents said they're confident that access to credit markets is improving, up from 32 percent in October 2012. The survey said 41 percent of respondents have a debt-to-capital ratio of less than 25 percent, down from 53 percent of respondents in October 2012 and 59 percent in April 2012.
Despite optimism about credit, 51 percent of respondents said they expect to use cash to pay for transactions, rather than debt or equity. The study's authors say this may be indicative of an "ongoing cautionary mindset."
In addition, while more than half of respondents said they're focused on growth, 32 percent said they'll be focusing over the next year on cost reduction and operational efficiency.
Ernst & Young surveyed about 147 automotive executives in February and March to compile the automotive subset of the multi-industry barometer. More than half of respondents are C-level executives, a third of whom are division heads and the rest are senior vice presidents, vice presidents and directors. Companies included in the survey are located throughout the world and represent a wide range of sizes.