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Executive Appetite for M&A Falls on Turmoil, Report Says

A combination of unstable economic conditions and concern over valuation gaps will probably hold back mergers and acquisitions over the next year, according to a survey of corporate executives by consultancy Ernst & Young.

Just 25 percent of respondents to the firm’s Capital Confidence Barometer said they expect to make acquisitions in the next 12 months, down from 41 percent a year ago and the lowest figure since the study was initiated in 2009, Ernst & Young said in a statement. In addition to economic concerns, more than a quarter of the respondents said they expect prices for targets to decrease, compared with 16 percent in 2011, encouraging them to hold off on dealmaking.

Global mergers slumped to their lowest level since 2009 in the third quarter as evidence mounted that the global economic recovery is sputtering. Only one transaction larger than $10 billion, Chinese oil firm Cnooc Ltd.’s proposed purchase of Canada’s Nexen Inc., was announced in the period.

Small deals may remain the main form of M&A for some time. More than 80 percent of executives surveyed by Ernst & Young said they will make deals worth less than $500 million.

“There will be fewer transformational deals, which is reflected in the preference for smaller deal sizes,” said Pip McCrostie, the firm’s global vice-chair of transaction advisory. “Executives are clearly signaling an aversion to risk, preferring smaller deals to fill strategic gaps.”

Some of the year’s largest transactions have also run into opposition from investors. Since they announced their $33 billion mining merger in February, Glencore International Plc and Xstrata Plc have adjusted the terms three times to overcome shareholder objections. The proposed merger of European Aeronautics, Defence, & Space Co. with BAE Systems Plc has been challenged by opponents including the German government and EADS’s own chairman, Arnaud Lagardere.

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