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Global M&A appetite falls to 4-year low as Brexit, trade worries deepen

Corporate appetite for acquisitions has fallen to a four-year low amid rising geopolitical concerns even with global M&A volume in 2018 set to hit a near-record high, according to EY's biannual Global Capital Confidence Barometer survey.

Only 46% of the more than 2,600 executives surveyed in 45 countries plan to make an acquisition in the next 12 months, down from 56% last year. Regulation and political uncertainty were cited by 46% of respondents as the biggest risks to deal-making in the coming year, with Brexit talks talks, which have stalled, and U.S.-China trade tensions among the issues weighing on sentiment.

"Despite stronger-than-anticipated first-half earnings and the undeniable strategic imperative for deals, we can expect this year to finish with much weaker M&A than how it started," said Steve Krouskos, EY global vice chair for transaction advisory services. "This is likely to be just a pause, not a complete stop. Fundamentals and the strategic rationale for deals remain strong, and the appetite to acquire will likely grow toward the second half of 2019."

The cautious deal-making mood is partly driven by uncertainty in Brexit negotiations, which is a key focus for all executives surveyed, EY said. Forty-one percent preferred an economic free trade agreement similar to Switzerland's, 22% chose the Canadian free-trade agreement model, 6% favored a World Trade Organization rules-based outcome, while only 5% support a second referendum.

Many companies continue to plan cross-border deals, with 20% of executives turning their focus toward international opportunities. The U.S. ranked as the top investment destination, with the U.K. rising to second from fifth in EY's April survey. Canada, Germany and France rounded out the top five.

"Many companies are looking to M&A to mitigate the potential impact of trade and tariff policies, secure market access and protect supply chains," Krouskos said. "All of the top M&A destinations of choice are countries embroiled in trade uncertainties, suggesting that those companies planning deals are actively looking to get ahead of potential geopolitical disruption."

EY also noted that the growing risk of technological disruption has prompted more firms to optimize their portfolio, led by those from Japan and China, with 73% of companies having identified assets to divest due to under-performance or risk of disruption.

With divestitures likely to increase, 31% of executives expect private equity firms to emerge as major acquirers in the next year and 68% believe private capital, including private equity and corporate investment funds, will become their biggest competition for assets. "Fund managers are allocating more to private capital than ever before in the history of modern capital markets. Many will use private equity as a vehicle to deliver returns, while others will increase direct investing activity," said Krouskos.