Sellers fear value issues as growing risk

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Corporate leaders fear the impact of rising valuations, citing them as the biggest current challenge.

Global provider of virtual data rooms and services for regulatory disclosure, Merrill Corporation conducted a poll on the outlook for corporate development in 2018, and the results showed 42% of EMEA participants (corporations and advisors) believe high valuations are the greatest corporate challenge of 2018.  

“You think sellers would take advantage of high valuations, but the flipside is the prospect of even higher valuations down the road”, said Jonathan Rothenberg, senior vice-president, corporate development and M&A at GlobalLogic, speaking at the recent Merrill Insight event.

A third of poll participants in the EMEA region cited political and regulatory uncertainty as the greatest corporate challenge, while less than one-fifth (18%) believe a black swan event, such as Brexit, will mark a significant challenge for companies.

Hilary London, Chief Revenue Officer and General Manager for EMEA at Merrill Corporation added: “We are not surprised to see high valuations as headwind for successful transactions. It is something our due diligence and regulatory reporting clients regularly mention. What is more interesting is to see EMEA respondents being far more concerned about political uncertainty and black swan events compared with US respondents”.

Nearly half of those who participated in the poll said corporations would most likely use cash to grow acquisitively, despite concerns of high valuations, while a quarter of EMEA participants cite R&D, and one-fifth say a return of cash to shareholders. While participants in EMEA and the Americas have a similar view on acquisitive growth, a greater proportion of EMEA participants cite R&D spending versus their US counterparts.

The poll found there is a greater need for advisors to understand legislative and regulatory changes to help navigate specific markets, according to 43% of EMEA participants. Just one-fifth feel they need an advisor’s assistance with corporate integration despite it being the greatest internal challenge facing corporations after an acquisition. A further one-fifth think an advisor would be useful for sourcing potential opportunities.

Thirty five percent of participants cited Artificial Intelligence (AI) as the trend likely to have the biggest technological impact on our lives in the next five years. A further one-third believe it is big data. A far greater proportion of advisors than corporations cite AI. The opposite is true for views on big data.

“Artificial intelligence has the ability to change how everything works in areas of machine automation, unmanned transportation and data processing,” said Justin Gans, director of acquisitions at Northrop Grumman Aerospace.