Companies adjusting to slow-growth economic conditions have come to terms with the need for mergers and acquisitions (M&A), but have become much more cautious when closing deals, according to a report released Wednesday.
Ernst & Young's 14th biannual Media & Entertainment Global Capital Confidence Barometer (CCB) set out to survey executives on their perspective of the state of the global economy. About 84% expect stability or modest growth in the next 12 months. None anticipate strong growth, down from 23% six months ago.
Industry executives have become more cautious when making deals. Many bids, including Yahoo's, continue to come in at figures that are much less than expected.
Eighty percent of media and entertainment respondents to the EY survey indicated that they had walked away from a planned acquisition within the last 12 months, according to John Harrison, EY Global Media & Entertainment Leader, Transaction Advisory Services.
"Our clients are less willing to overpay for assets and are focused intensely on conducting thorough due diligence to ensure a potential transaction meets all key investment criteria," Harrison told Media Daily News. "This focus is based on hard lessons learned in prior deals."
Some 36% of survey respondents indicated that failure to achieve synergies or poor execution of integration were the most significant issues that contributed to completed deals not fulfilling expectations.
Despite wavering confidence in the economy and greater skepticism in closing deals, 45% of media and entertainment (M&E) executives expect to pursue acquisitions during the next 12 months, per the study.
While executives realize that M&A activity could provide a well-needed tailwind, the percentage of positive attitudes and level of confidence continues to fall, with only 37% saying they will likely close a deal within the next year.
That's down from 44% in October 2015. Some 55% have a positive attitude about the quality of acquisitions, compared with 60% in October 2015.
The findings suggest that 84% of company executives expect economic stability with modest growth. Zero expect strong growth, and 38% perceive an increase in global and political instability to become the greatest economic risk to business during the next six to 12 months.
Harrison points to two main drivers for acquisition. Company executives are looking outside their traditional business to acquisition targets that deliver new capabilities, technologies, management talent or end-markets with attractive growth fundamentals.
He points to investments made by established media and entertainment players in mobile-centric digital content programmers that create short-form video consumed on-the-go by Millennials or Gen Z.
Second, companies in several media sub-sectors -- MVPDs, TV broadcasting, film studios, cinemas, newspaper publishing and others -- are pursuing horizontal M&A to increase scale, rationalize the industry and achieve efficiencies that will help boost earnings in a low-growth environment.
"Tough market conditions and no sign yet of systematic shocks in capital markets or impending assets bubbles" will force companies to take unusual actions, according to the report.
Mitigating risk and building growth means that 56% expect to focus on making better use of digital technology and analytics to drive growth in the next year. Some 48% see the impact of digital technology on their company's business model elevated on the boardroom agenda during the past six months.
Nearly 24% plan to enter alliances with other companies and event competitors to create value in their services.
For those willing to cross borders, the growth model will take M&A activities overseas, with 78% planning to pursue cross-border acquisitions during the next 12 months. The UK and U.S. are the top two investment destinations, followed by France, Canada and China.