Capital Markets: NZ companies get ready for the rebound

Andrew Taylor.

EY's Capital Confidence Barometer shows optimism globally and locally, writes Andrew Taylor.

For the first time since the Global Financial Crisis all the pieces are in place supporting the rebound in merger and acquisition activity in New Zealand.

Fuelled by the partial sales of government-owned Mighty River Power, Meridian and Genesis, and increasing optimism in the strength of our economic recovery, 57 per cent of respondents to EY's just-released NZ Capital Confidence Barometer expect deal volumes to improve in the next 12 months.

And 43 per cent of these Kiwi respondents plan to pursue acquisitions, compared with 31 per cent six months ago and 27 per cent in April 2013.

The latest results show executives are more optimistic, at the global and local level. Overall, 79 per cent of New Zealand respondents believe our economy will improve in the next 12 months - one of the highest confidence levels among the 48 countries in the survey.

Last month, we surveyed 816 respondents globally, representing 20 industry sectors. The results, indicating a rebound in confidence in the public markets, are also reflected in another just-released survey, covering New Zealand's private equity and venture capital sector. After a grim 2012, when total private activity (investments and divestments) was just $188 million, the latest NZ Private Equity and Venture Capital Monitor reveals total activity at $1.1 billion in 2013 - almost back at the 2011 level of $1.4 billion.

Total investment value in the private market was $456.2 million spread across 82 deals, compared with $111.4 million from 62 deals in 2012. Of those planning deals in the public markets, 74 per cent of respondents have at least two deals in the pipeline.

Powering this is, in part, better access to credit. More companies now plan to use debt to help fund acquisitions - 57 per cent of respondents, compared with 27 per cent a year ago. So, despite record cash balances, executives are seeking to maximise returns from debt financing, spurring the shift from cash to debt.

Respondents say their main objective is to gain share in existing markets (83 per cent compared with 57 per cent six months ago). Last October, 75 per cent said a share in new markets (products or geography) was the major factor behind their deal-making intentions. This is now only 17 per cent.

Overall, the latest survey shows a shift in the agenda, from the cost-cutting and capital preservation focus of a year ago to a strategy of raising and optimising capital. In April 2013, only 9 per cent of respondents s were primarily focused on capital raising; the figure is now 28 per cent. Only 14 per cent are focused mainly on preserving capital compared with 32 per cent a year ago.

Another big change is hiring intentions. In New Zealand and globally, the survey reveals a big drop in job creation expectations.

In New Zealand, only 36 per cent of respondents expected to create jobs or hire talent in the next 12 months, compared with 54 per cent six months ago and 68 per cent in April last year. Some 57 per cent of respondents said they would maintain their current workforce size (compared with 38 per cent last October). Only 7 per cent were planning to cut staff numbers, compared with 32 per cent in April 2013.

These figures are consistent with EY's global results. As in other countries, New Zealand's hiring intentions are likely to be affected by the global trends such as "future of work" issues (eg, the skills gap and competition for talent) and digital transformation (eg, big data, the cloud, mobile).

"Global rebalancing" and future of work issues were cited by Kiwi respondents as the trends most likely to impact on their business and acquisition strategy in the next 12 months.