Capital Markets: Company alliances the way of the future

The EY report says relationships between companies are becoming more fluid and complex as business models are reinvented. Photo / iStock

More companies are planning to form alliances to create value from under-utilised assets and to speed up growth.

The latest EY Global Capital Confidence Barometer found that 40 per cent of executives surveyed planned to enter alliances with other companies, even competitors, to take advantage of the expertise and reach of others.

These alliances join mergers and acquisitions as engines of growth.

The alliances are usually more informal and less permanent than joint ventures -- each company maintains its autonomy with a view to creating a shared opportunity, such as entering a new market or developing a more effective process.

The EY report says relationships between companies are becoming more fluid and complex as business models are reinvented. These unprecedented collaboration and relationship opportunities involve customers, suppliers -- and competitors.

Executives are also increasingly looking to alliances to help respond to digital transformation.

Companies are often outsourcing innovation and traditional services to more nimble and agile service providers to stay ahead of this digital revolution.

Pip McCrostie, EY's global vice chair of Transaction Advisory Services, says executives now find themselves planning for multiple possible futures.

Mergers and acquisitions remains a strong option to accelerate strategic plans. At the same time, alliances are becoming more attractive as companies seek new sources of revenue and earnings while looking to manage costs and risk. Increasingly, companies are taking this option to bolster their research and development processes.

The sectors with the highest appetite to acquire were: oil and gas, and consumer products and retail 59 per cent; power and utilities 58 per cent; diversified industrial products 55 per cent and life sciences 51 per cent.

The top investment destinations were the United States, United Kingdom, India, China and Germany.

The report found that in spite of tough market conditions in global equities, commodities and currencies, there were no signs yet of systemic shocks in capital markets or impending asset bubbles.

The volatility in the commodity and currency markets and political instability in the Middle East, Korean Peninsula and South China Sea were considered very serious but have not altered medium- to long-term capital allocation strategies.

Key mergers and acquisitions findings from the barometer

• 50 per cent of respondents expect to actively pursue acquisitions in the next 12 months

• 74 per cent are considering cross-border investments

• 37 per centexpect distressed asset sales to become more prominent in deal making

• and the appetite for US$1-5b deals has increased five times