11th global capital confidence barometer...future of work and global rebalancing are the two biggest...

11th Global Capital Confidence Barometer Consumer products companies display renewed optimism to grow October 2014

11th Global 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 comprises an independent EIU panel of senior executives and select EY clients and contacts.

Our 11th 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 Agendas.

Respondent profile ► EIU panel of more than 1,600 executives

surveyed in August and September 2014 ► 298 executives from consumer products

and retail ► Companies from 62 countries ► Executives from 18 industry sectors ► 949 CEO, CFO and other C-level executives ► More than 800 companies Fortune

1000-qualified based on revenues


► Will consumer products (CP) companies’ confidence to take on debt lead to more intense deal activity in the future?

► How “modest” are the valuations of quality targets?

► How long will the margin focus continue to drive M&A?

► As M&A action increases in developed/mature markets, are CP companies only looking for smaller emerging market targets?

Talking points


*Compared to six months ago

Confidence in stability revives growth aspirations

In sync with other sectors, CP companies are finding the economic environment stable in the absence of any major systemic financial shock.

Increased global political instability is now the most named economic risk among CP respondents (35% of mentions).

Displacing global rebalancing, future of work emerges as the most important trend impacting a CP company’s business strategies. Digital transformation is now the most important trend determining acquisition strategies of CP companies.

Increasing confidence despite increased geopolitical risk

Stable economy

+1,400 basis points (bps)

Increased global political instability

#1 risk

Future of work impacts strategy

#1 trend

Growth focus returns, but margins remain important The number of CP companies focusing on growth increased to 52%, while those struggling for survival have come down to 1% (from 7% six months ago).

Focus on growth*

+1,400 bps

A focus on growth and confidence in economic stability will provide a boost to the hiring intentions of CP companies.

Create jobs*

+2,200 bps

While CP companies turn optimistic about the growth, they are not losing sight of profitability – more than one-third of CP companies continue to describe cost reduction and operational efficiency as their key priority. Focus on profitability

36%

Fifty-two percent of CP companies name “optimizing” the highest priority on their Capital Agendas.

Optimizing*

+100 bps


Middle-market, efficiency driven M&As set to increase

Forty-five percent of CP companies name cost reduction and margin improvement as the most important driver for their M&A strategy over the next year.

Reduce costs, improve margins

#1 driver

Increase in debt-to-capital ratio

Healthy balance sheets of CP companies and positive economic outlook will enable them to take on debt to fund growth. More than half of the CP companies expect to make debt-financed acquisitions.

+2,000 bps

There is a significant increase in acquisition strategy/focus on investing in the mature markets. CP companies are now considering all markets equally for potential investments.

Mature market acquisitions/ investment

+2,300 bps

Sixty-four percent of CP respondents are confident about the number of acquisition opportunities, which is higher compared to other sectors.

Number of opportunities*

+1,400 bps

CP companies expect smaller deals compared to six months ago: 52% expect a deal size of less than US$50m; only 5% expect a deal size bigger than US$500m.

Deal size <US$50m*

+1,500 bps

*Compared to six months ago

M&A appetite grows as mature markets make a comeback 39% Expect to pursue acquisition

CP companies expected to pursue acquisitions over the next year witnessed a sharp increase of 11% over the last six months. Sixty-four percent of CP respondents expect an improvement in the global M&A market.


Economy — increasing confidence in a stable outlook despite some geopolitical risks


CP executives underscore stability of the global economy

54%

44%

2%

58%

30%

12%

62%

26%

12%

Improving

Stable

DecliningOct-14

Apr-14

Oct-13

53%

44%

3%

60%

31%

9%

65%

24%

11%

Improving

Stable

Declining

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

► Regional/local economic and geopolitical issues may have hit further economic recovery, but businesses are increasingly finding the environment stable in the absence of any major systemic shock.

Global respondents CP and retail respondents


Emerging markets concerns stabilize

►

37%

25%

15%

14%

7%

2%

30%

21%

26%

14%

6%

3%

Increased global politicalinstability

The effects of tapering ofquantitative easing

Slowing growth in keyemerging markets

Pace of structural reforms inEurozone

Inflation

Deflation

35%

25%

18%

12%

8%

2%

27%

20%

15%

26%

8%

4%

Increased global politicalinstability

The effects of tapering ofquantitative easing

Pace of structural reformsin Eurozone

Slowing growth in keyemerging markets

Inflation

DeflationOct-14Apr-14

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

► Driven mainly by continuing tensions between Ukraine and Russia, the rapid escalation of the Middle East crisis and protests in Hong Kong, geopolitical concerns take center stage for all businesses.

► The risk of slower growth in CP emerging markets has come down by more than half over the last six months. China remains resilient, while India witnesses an improving political and economic scenario.

► CP respondents are showing more concern around tapering of quantitative easing in the US and the pace of reforms in the Eurozone.



Changing work patterns and shifting center of gravity affect CP strategies; digital impacts acquisition strategy

Which of the following will impact a) your core business and b) your acquisition strategy most in the next 12 months? Select up to two.

► Future of work and global rebalancing are the two biggest trends affecting business behaviors in CP.

► Digital transformation is the most important trend driving acquisition strategy of CP players.

► Global rebalancing concerns are higher for the CP players compared to the other sectors. However, the impact of changes in the government is perceived as a lesser concern by the CP players.


50%

39%

32%

27%

26%

16%

4%

36%

30%

32%

37%

26%

23%

6%

Future of work

Global rebalancing

Rethinking government

Digital transformation

Resourceful planet

Reconfiguring thefinancial system

CybersecurityBusiness

Acquisition

44%

34%

33%

33%

27%

18%

4%

38%

27%

37%

32%

26%

21%

4%

Future of work

Rethinking government

Digital transformation

Global rebalancing

Resourceful planet

Reconfiguring thefinancial system

Cybersecurity


Confidence of CP executives is growing across key financial indicators, except on credit availability

77%

64%

58%

54%

65%

54%

54%

49%

43%

21%

48%

29%

Corporate earnings

Short-term market stability

Credit availability

Equity valuations/stockmarket outlook

72%

61%

55%

47%

63%

49%

48%

56%

50%

25%

33%

52%

Corporate earnings

Short-term market stability

Equity valuations/stock marketoutlook

Credit availability

Oct-14Apr-14Oct-13

% response positive

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

► Corporate earnings were very strong in US in the second half of 2014, with 70% of the S&P 500 beating estimates. However, the Eurozone and UK were mixed, with currency and regional concerns depressing results.

► CP respondents are generally less confident than respondents from other sectors, except on valuations/stock market outlook.

► While other indicators show continuous improvement, confidence of CP players in credit availability decreases.



11%

17%

7%

41%

52%

41%

48%

31%

52%

Oct-13

Apr-14

Oct-14

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

9%

17%

5%

48%

55%

45%

43%

28%

50%

Oct-13

Apr-14

Oct-14

Improving indicators are driving positive hiring intentions of CP companies

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

► With greater clarity of economic outlook, rising corporate earnings and confidence in short-term stability, companies are significantly more optimistic about increasing their workforce.

► While CP companies continue to focus on costs, they are also planning to reinvest in the business and build the right capabilities.



Growth strategies — CP companies are now more growth driven, without losing sight of margins


2%

6%

1%

8%

17%

15%

32%

37%

35%

58%

40%

49%

Oct-13

Apr-14

Oct-14

SurvivalMaintain stabilityCost reduction and operational efficiencyGrowth

3% 7%

1%

9%

19%

11%

30%

36%

36%

58%

38%

52%

Oct-13

Apr-14

Oct-14

Global respondents

CP and retail respondents

41% 52%

58%

40%

49%

39%

49%

58%

38%

52%

0%

20%

40%

60%

80%

Oct-12 Apr-13 Oct-13 Apr-14 Oct-14

Global respondentsConsumer products and retail respondents

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

► Companies across the sectors are looking to the future while being mindful of lessons learned during the global financial crisis. There is a sharp increase in growth focus, while survival risks have come down.

► For the first time in the last two years, CP companies are now more growth focused compared to the other sectors. However, they are not wavering from their focus on cost structures and operational efficiencies.

Survival is no longer a concern, companies are now focused on growth

% focused on growth


Global respondents CP and retail respondents What is the primary focus of your company’s organic growth over the next 12 months?

► Evolving consumer preferences are reshaping categories and markets, mandating CP companies to be more agile.

► The changing mix of existing products and services is increasing significantly at the expense of other risks.

► R&D focus decreased to 13%, suggesting a cautious approach to innovation.

► Companies are mindful of the investor preference for a focus on the core.

23%

14%

24%

11%

40%

17%

More rigorous focus on coreproducts/existing markets

New sales channels

Lower risk 30%

10%

24%

11%

40%

20%

More rigorous focus on coreproducts/existing markets

New sales channels

Lower risk

Oct-14

Apr-14

Oct-13

30%

22%

8%

3%

21%

17%

15%

12%

9%

6%

16%

12%

Changing mix of existing products &services

Increase R&D/product introductions

Exploiting technology to develop newmarkets/products

Investing in newgeographies/markets

Higher risk 38%

13%

6%

3%

28%

19%

10%

8%

12%

7%

15%

6%

Changing mix of existing products &services

Increase R&D/product introductions

Investing in new geographies/markets

Exploiting technology to develop newmarkets/products

Higher risk

CP companies highlight accelerating need for change


M&A contribution to growth is decreasing

69%

27%

4%

55%

39%

6%

Less than 25%

25%–49.9%

Greater than 50%

70%

28%

2%

61%

37%

2%

Less than 25%

25%–49.9%

Greater than 50%Oct-14Apr-14

What percentage of your planned growth for the current fiscal year is explicitly assigned to acquisitions?

► Companies are not planning acquisitions at the expense of organic growth – but they expect to do deals that are aligned to their strategy.

► More than two-thirds (70%) of CP companies are planning for less than 25% of growth assigned to acquisitions.



68%

24%

5%

3%

39%

33%

19%

9%

44%

32%

16%

8%

Less than 25%

25%–49.9%

50%–74.9%

75%–100%

73%

21%

4%

2%

44%

33%

16%

7%

40%

43%

13%

4%

Less than 25%

25%–49.9%

50%–74.9%

75%–100% Oct-14

Apr-14

Oct-13

What is your company’s current debt-to-capital ratio?

► Companies are well-placed to withstand any increase in interest rates through the early stages of the impending rate hike.

► The economic crisis of the past and an ultracautious approach to capital over a long period of time have resulted in an increasing number of CP companies with low levels of leverage.


Continued balance sheet discipline has led to a drop in highly levered CP corporations …


… but they are willing to take on debt to fund growth …

34%

40%

18%

46%

33%

36%

20%

27%

46%

Oct-13

Apr-14

Oct-14

Decrease Remain constant Increase

34%

36%

19%

48%

39%

36%

18%

25%

45%

Oct-13

Apr-14

Oct-14

How do you expect your company’s debt-to-capital ratio to change over the next 12 months?

► As companies move beyond a global financial crisis mindset and look to the future, they are more willing to take on debt. The number of companies looking to de-lever through the next 12 months has dropped by more than half.

► A significantly greater number of CP companies are planning to use debt to support their growth agendas. A lesser number of CP companies are relying on just using their earnings to grow business.



49%

12%

11%

28%

Debt

Equity

Cash

Alternate funding

51%

11%

2%

36%

Debt

Equity

Cash

Alternate funding

Oct-14

What is likely to be the main source of your company’s deal financing in the next 12 months?

► Healthy and robust balance sheets will allow deals to be funded through increased leverage.

► CP companies indicate an increasing willingness to take on debt to finance M&A – 10% increase compared to six months ago.

► Alternate funding avenues are more like to play a role in CP deal financing compared to other sectors.


… and make debt-financed acquisitions


Global respondents


Global respondents


Global respondents


Global respondents


50%

14%

16%

Oct-13

Apr-14

Oct-14

31%

50%

51%

Oct-13

Apr-14

Oct-14

5%

4%

0%

Oct-13

Apr-14

Oct-14

14%

32%

33%

Oct-13

Apr-14

Oct-14

5%

3%

0%

Oct-13

Apr-14

Oct-14

14%

28%

33%

Oct-13

Apr-14

Oct-14

52%

23%

15%

Oct-13

Apr-14

Oct-14

29%

46%

52%

Oct-13

Apr-14

Oct-14

On which of the following capital management issues is your company placing the greatest attention and resources today?

What is your capital focus?

The Capital Agenda


47%

32%

29%

26%

18%

15%

10%

5%

2%

Cost reduction

Share buy-back

Cash dividend payments

Strategic divestment

Portfolio analysis

Spin-off/IPO

Acquisition

Our shareholders have not raisedthese issues

We do not have shareholders Oct-14

Shareholder activism continues to drive margin focus

48%

30%

28%

25%

20%

14%

11%

5%

1%

Cost reduction

Share buy-back

Cash dividend payments

Strategic divestment

Portfolio analysis

Spin-off/IPO

Acquisition

Our shareholders have not raisedthese issues

We do not have shareholders

Which of the following has been elevated on your boardroom agenda as a result of shareholder activism? Select up to two.

► The large amount of cash sitting on US non-financial company balance sheets continues to drive shareholder activism. Activist shareholders are reinforcing the disciplined approach to manage costs to improve profitability.

► Strategic divestments are increasingly driven by shareholder activism.

► For CP companies, the importance of activist-driven share buy-backs and spin-off/IPOs increased significantly over the last six months.


Presenter

Presentation Notes

Shareholder activism is causing CP companies to adopt private equity time frames


CP companies are proactively identifying areas of potential activist concerns

24%

22%

17%

17%

9%

8%

3%

23%

19%

20%

18%

10%

7%

3%

Ensuring we have open and proactive lines of communication with ourshareholders

Monitoring early warning signs for activist pressure

Conducting an “activist audit” – continue with improvement around cost, efficiencies and performance

Conducting ongoing portfolio review to grow revenue, increase marginsand optimize value

Nothing: we are confident in our current strategy and not actively preparingfor activism among our shareholders

Making management changes as a result of activist intervention

Not applicable Global respondentsConsumer products and retail respondents

How are you preparing to manage shareholder activism?

► Companies are learning to engage better with their shareholders and are on the lookout for signs of potential activist pressure.

► CP companies are ahead of other sectors in managing margins and reviewing portfolios to manage shareholder activism.


M&A — acquisition appetite grows as mature markets make a comeback


Source: Dealogic & EY analysis Excludes real estate asset acquisitions

Sectors with highest intention to pursue acquisitions in CCB 11

► CP and retail is among the sectors showing the biggest appetite for transactions. Total deal value in the CP sector reached a six-year high in 2Q 2014.

► Apart from CP, sectors with high levels of intellectual property, such as technology, life sciences and media and entertainment, have seen a series of large-scale transactions in 2014.

Aerospace and defense

Automotive and transportation

Financial services

CP and retail Diversified industrial products

Govt, public sector

Life sciences

Media and entertainment

Mining and metals

Oil and gas

Other sectors

Power and utilities

Provider care

Real estate

Technology

Telecommunications

High volume

High value

Low value

Low volume Few deals, high value Few deals, low value

Many deals, high value Many deals, low value

Global M&A – relative performance by sector (Last Twelve Months to August 2014)

CP emerges as one of the most active sectors for M&A


CP companies expect the M&A market to improve

60%

39%

1%

58%

36%

6%

69%

26%

5%

Improve

Stay the same

Decline

64%

35%

1%

54%

39%

7%

66%

29%

5%

Improve

Stay the same

DeclineOct-14

Apr-14

Oct-13

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

► The positive performance of the deal markets in 2Q 2014 has helped boost the outlook for M&A.

► CP deal volumes are also making steady progress – 2Q deal volumes increased by 4%.

► The trend toward improving deals is consistent with the macroeconomic positivity, leading to confidence in future dealmaking.



24%

32%

19%

10%

15%

26%

30%

13%

8%

23%

1

2

3

4

>=5

20%

31%

19%

10%

20%

20%

38%

14%

10%

18%

1

2

3

4

>=5

Oct-14Apr-14

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

► While other sectors witness a shift toward a larger pipeline, CP companies are evaluating select deals.

► Of CP companies that have deals in their pipeline, 28% have more than three deals in their pipeline. For other sectors, this percentage is 31%.

► A sharper focus and search for right targets should result in more rigorous deal diligence.


More than half of CP firms have one or two deals in their pipeline …


66%

29%

5%

29%

62%

9%

Increase

No change

Decrease

66%

28%

6%

28%

63%

9%

Increase

No change

DecreaseOct-14Apr-14

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

► Increasing pipelines indicate a pickup in potential M&A momentum in the mid-term.

► Responses to changing consumer preferences and innovation are likely to prompt increases in the deal pipeline. ► Bolt-on acquisitions present an attractive opportunity for CP companies.


… and increasingly expect the pipeline to get busy


Number and quality of CP acquisition targets increase

CP and retail respondents Global respondents

44%

51%

58%

32%

41%

51%

42%

43%

61%

Likelihood ofclosing

acquisitions

Quality ofacquisition

opportunities

Number ofacquisition

opportunities

41%

52%

64%

30%

44%

50%

38%

45%

56%

Likelihood ofclosing

acquisitions

Quality ofacquisition

opportunities

Number ofacquisition

opportunities

Oct-14 Apr-14 Oct-13

Level of confidence at the global level:

25% 29%

35% 31%

40%

30% 31%

34%

27%

39%

0%

20%

40%

60%

Oct-12 Apr-13 Oct-13 Apr-14 Oct-14

Expectations to pursue an acquisition

Global respondents

Consumer products and retail respondents

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

► The desire to pursue acquisitions has rebounded after a dip in early 2014. There is significant improvement in expectations of CP companies to pursue an acquisition – an increase of 11%.

► Companies are learning how to transact in a normalized market but within a new regulatory and investor environment.

► CP companies are more optimistic about the available acquisition opportunities and their quality, but compared to other sectors, they are more conservative in their confidence to close the deals.


CP will witness a strong shift toward middle market, but headroom for large strategic deals still exists

38%

37%

52%

32%

30%

36%

17%

13%

7%

9%

6%

4%

4%

14%

1%

Oct-13

Apr-14

Oct-14

► Companies are more likely to undertake strategic, small-size deals (<US$500m) over the next year.

► The shift toward the middle market is supportive of the desire to pursue bolt-on acquisitions.

► However, there is still room for large strategic deals. CP has already witnessed more megadeals compared to all of 2013. These include Bayer’s purchase of Merck’s over-the-counter consumer health care business, Tyson Foods’ acquisition of Hillshire Brands and the merger of the coffee businesses of D.E. Master Blenders 1753 and Mondelēz International.

Global respondents CP and retail respondents What is the maximum single deal value expected over the next 12 months?

27%

23%

50%

31%

30%

31%

23%

20%

10%

14%

15%

4%

5%

12%

5%

Oct-13

Apr-14

Oct-14

Less than US$50m US$50m – US$249.9m US$250m – US$499.9m US$500m – US$999.9m Greater than US$1b


5%

35%

50%

8%

2%

Significantly higher (25% or more)

Somewhat higher (10-25%)

The gap is small (<10%)

Somewhat lower (10-25%)

Significantly lower (25% or more)

4%

35%

51%

9%

1%

Significantly higher (25% or more)

Somewhat higher (10-25%)

The gap is small (<10%)

Somewhat lower (10-25%)

Significantly lower (25% or more)

Oct-14

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

► An increasing number of CP companies believe that the valuation gap is small, indicating improved motivation to pursue deals and increase in pipeline. A stable economic outlook and better performance also influence valuation perception.

► A small valuation gap also indicates that the market is not overheated.


Modest valuation gap reflects confidence in CP asset prices …


… and volatility in asset valuations is likely to reduce …

33%

59%

8%

45%

43%

12%

42%

43%

15%

Increase

Remain at currentlevels

Decrease

30%

62%

8%

41%

46%

13%

43%

42%

15%

Increase

Remain at current levels

Decrease Oct-14

Apr-14

Oct-13

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

► Sixty-two percent of CP respondents expect stable valuations over the next year, a significant increase compared to six months ago (46%). It is also much higher compared to respondents expecting an increase in asset prices (30%).

► As buyers perceive that any newly acquired assets will not lose value in the near- and mid-term, M&A is expected to gain momentum.



11%

74%

15%

25%

55%

20%

16%

53%

31%

Contract

Stay the same

Widen

11%

80%

9%

25%

56%

19%

15%

51%

34%

Contract

Stay the same

Widen Oct-14

Apr-14

Oct-13

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

► An extremely high number of CP companies (91%) expect valuation gaps to contract or remain the same.

► Compared to six months ago, there is a big drop in the number of CP companies expecting widening of the valuation gap – 9% versus 19%.

► Stability in valuations allows more productive negotiations on asset sales, but the limited availability of high-quality assets means that companies will have to pay a premium for best assets. Are they willing to do that?


… but are the right targets available at modest valuations?


45%

41%

35%

34%

32%

31%

24%

19%

11%

7%

3%

45%

41%

36%

37%

30%

27%

24%

23%

11%

5%

2%

Reduce costs, improve margins

Move into new geographical markets

Access new technology/intellectual property

Improvements to supply chain

Move into new product/services areas

Gain market share in existing geographical markets

Acquire talent

Acquire assets at a discount – opportunistic M&A

Optimize tax efficiencies

Navigate regulatory issues

Leverage regulatory/legislative opportunitiesGlobal respondentsConsumer products and retail respondents

What are the main drivers impacting your M&A strategy over the next 12 months? Select up to three.

► Companies are beginning to look at a range of transaction drivers while remaining mindful of cost discipline. Over the past six months, margin improvement displaced expansion in new markets as the most important driver for CP acquisitions.

► Access to new technology/IP as an acquisition driver for CP companies jumped to 36% (from 6% six months ago).

Margin improvement and presence in new geographies drive CP acquisitions


Global respondents CP and retail respondents Are your M&A deals planned in or outside your core sector?

73%

19%

8%

We are looking to acquirecompetitors/similar companies in

our core sector

We are looking both inside andoutside of our core sector

We are looking outside of ourcore sector

75%

18%

7%

We are looking to acquirecompetitors/similar companies in

our core sector

We are looking both inside andoutside of our core sector

We are looking outside of ourcore sector

Oct-14

► Large multinational CP companies are optimizing their brand portfolios through the disposal of non-core and lower-growth businesses and the acquisition of faster-growing and/or higher-margin businesses. ► P&G agreed to sell the majority of its pet food business to Mars, while Tyson Foods acquired Hillshire Brands.

► The stable economic outlook and improving corporate earnings in developed markets also reflect in a more rigorous focus on core products/existing markets.

Desire for market share and margin growth reinforces the importance of core business …


Your planned M&A activity will mostly be:

► Companies continue to take less risky options when acquiring assets. However, there is a willingness to make bolder acquisitions when justifiable.

► While the focus remains on growing the core, CP companies are also more likely to engage in disruptive as well as defensive deals compared to other sectors.

Which statements best describe your M&A plans?

… and bolt-on acquisitions are expected to support the consolidation of core offerings

63%

37%

68%

32%

Bolt-on (complement currentbusiness model)

Transformative (high-valueacquisition, which

significantly changesthe size of acquirer)

Global respondents Consumer products and retail respondents

59%

23%

18%

53%

26%

21%

We will focus on growing thecore (expanding your core

offering into new markets orproducts)

We will do disruptive deals (innovative investment which

shifts scope of buying business – could be into another industry sector)

We will do defensive deals (ensuring assets don’t fall

into competitor hands)



53%

47%

Yes

No

52%

48%

Yes

No

Oct-14

Do you expect to see an increase in hostile/contested M&A in the next 6-12 months?

► EY analysis of external data shows that hostile and unsolicited bids are at pre-crisis levels – but not at peak levels.

► CP companies follow other sectors in their expectation of increased hostile M&A activity.


Potential for hostile M&A reflects deal optimism


46%

50%

4%

50%

46%

4%

52%

45%

3%

Increase

Stayed the same

Decrease

Non-BRIC emerging market BRIC emerging market Developed/mature market

54%

44%

2%

55%

43%

2%

56%

42%

2%

Increase

Stayed the same

Decrease

How has your acquisition strategy toward/focus on investing in the following markets changed versus 12 months ago?

► Compared to a highly polarized scenario in favor of emerging markets six months ago, CP companies indicate considering all the markets for potential investment.

► Compared to other sectors, CP companies are more likely to increase M&A investments in developed/mature markets. Of the 10 largest acquisitions in 2Q, 8 involved a target company in the developed world.


Companies searching for measured growth – mature markets back in the fray


Top 5 destination countries Oct-14

Investment destinations span top-tier developed and emerging markets

Which are the top 5 countries (outside your local market) your company is most likely to invest in the next 12 months?

► Increasing confidence in the UK and the US make them top destinations for CP investment.

► China, India and Brazil remain the top three emerging markets slated to garner significant capital allocation.

Top destinations Global CP and retail UK UK India India US Brazil China US Brazil China

UK

India

Brazil

US China


31%

27%

21%

11%

10%

Political/regulatory risk in thosemarkets

Lack of infrastructure to supportgrowth in those markets

Slowing growth

Complexity and transparency

Currency risk

33%

30%

19%

10%

8%

Lack of infrastructure to supportgrowth in those markets

Political/regulatory risk in thosemarkets

Slowing growth

Currency risk

Complexity and transparency

Oct-14

If you are slowing or stopping your investments into certain markets, to what do you attribute this changing sentiment?

► Underdeveloped infrastructure in emerging markets is the biggest dampener for CP investments in these markets.

► CP companies continue to focus on long-term market potential and are less concerned by the slowing growth while determining investments.


Infrastructure bottlenecks and geopolitical risks impact CP expansion in emerging markets


30%

28%

27%

26%

21%

15%

13%

12%

9%

7%

32%

31%

28%

28%

23%

16%

8%

9%

7%

6%

Deal execution and integration capabilities

Lack of internal resources to handle the deal

Valuation gap

Lack of managerial focus on M&A

Shareholder activism

Adverse economic environment

Funding availability

Regulatory environment

Adverse political environment

Insufficient opportunities/suitable targetsGlobal respondentsConsumer products and retail respondents

What are the main challenges to your M&A strategy over the next 12 months? Select up to two.

► Internal challenges are the main barrier to achieving M&A goals in the near term across companies.

► CP companies face more pronounced issues around M&A execution compared to other sectors.

CP companies highlight lack of capability and resources to execute M&A


Are CP companies overpaying for assets in a bid to acquire limited attractive targets?

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

► The lack of quality targets continues to drive premiums across companies.

► Companies across sectors — but especially in CP — seem to inadequately execute due diligence, as unforeseen liabilities are the second most significant contributor to deals that fail to meet expectations.

► Margin deterioration continues to increase in importance despite sustained focus on cost-structure optimization.

32%

17%

17%

17%

11%

6%

30%

19%

19%

14%

13%

5%

Strategic value overestimated/purchaseprice multiple too high

Unforeseen liabilities (tax, HR, pension etc.)

Product/sales price and margin deterioration

Poor execution of integration

Sales volume declines/loss of customers

Poor operating cost assumptions



Survey demographics


Survey demographics

Global respondents



55%

32%

10%

2%

1%

Publicly listed

Privately owned

Private equity portfolio company

Family-owned

Government/state-owned enterprise

64%

22%

9%

3%

2%

Publicly listed

Privately owned

Private equity portfolio company

Family-owned

Government/state-ownedenterprise

27%

31%

24%

18%

$5b or more

$1b to $4.9b

$500m to$999.9m

Less than $500m

22%

31%

17%

30%

$5b or more

$1b to $4.9b

$500m to$999.9m

Less than$500m

Oct-14

Oct-14


59%

35%

6%

C-levelexecutive

SVP/VP/Director

Head ofBU/dept.

Oct-14

What is your position in the organization?

What best describes your company ownership?

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

59%

38%

3%

C-level executive

SVP/VP/Director

Head of BU/dept.


15%

13%

12%

8%

8%

8%

5%

5%

4%

4%

Consumer products and retail

Diversified industrial products

Automotive and transportation

Life sciences

Financial services

Technology

Media and entertainment

Power and utilities

Oil and gas

Telecommunications

Proportion of top industries represented

Global respondents

Oct-14

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. How EY’s Global Consumer Products Center can help your business Consumer products companies are operating in a brand-new order, a challenging environment of spiraling complexity and unprecedented change. Demand is shifting to rapid-growth markets, costs are rising, consumer behavior and expectations are evolving, and stakeholders are becoming more demanding. To succeed, companies now need to be leaner and more agile, with a relentless focus on execution. Our Global Consumer Products Center enables our worldwide network of more than 16,000 sector-focused assurance, tax, transaction and advisory professionals to share powerful insights and deep sector knowledge with businesses like yours. This intelligence, combined with our technical experience, can assist you in making more informed, strategic choices and help you execute better and faster. © 2014 EYGM Limited. All Rights Reserved. EYG no. EN0623 CSG/GSC2014/1503340 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.

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