Despite economic turbulence and market turmoil, 41% of leading international companies expect to make an acquisition in the next 12 months, according to Ernst & Young’s latest Capital confidence barometer, based on a survey of more than 1,000 senior executives around the world.

That’s a slight increase on six months ago, despite the intense market turmoil during August, when the survey was conducted.

In Canada, 45% of companies are planning to make an acquisition in the next year, up from 32% in April 2011.

“We’re seeing a real groundswell of confidence in the Canadian marketplace,” says Tony Ianni, a partner in Ernst & Young’s transaction advisory services practice. “These are still challenging times — but the difference is mergers and acquisitions now co-exist with volatility. That’s going to generate some very interesting transaction opportunities.”

“Canadian companies are buoyed by a solid debt structure, low interest rates, a strong Canadian dollar and very favourable regulatory environment,” adds Tony. “Combine those factors with 66% of our respondents saying they see the Canadian economy as stable or improving, and we’re operating in a local atmosphere that’s geared to deal-making.”

Stronger balance sheets together with a greater focus on operational fitness mean there is a continued appetite for M&A among large cap corporates. There is also a greater convergence around the price of assets, encouraging sellers to come to the table. Almost two thirds (57%) see valuations remaining at current levels for 12 months, resulting in a 30% uptick in potential sellers compared with six months ago — 26% of businesses now plan to divest in the next year.

The fifth bi-annual Capital confidence barometer, finds that almost half of respondents are focused on growth in the next 12 months, with only 7% now focusing on survival — the lowest number since the barometer was first published in 2009.

Stronger balance sheets encourage M&A

Three years of focusing on capital management underpins the resilient attitude of those companies who might come to the deal table. Large corporates are in much better shape than 2008. Balance sheets have been significantly strengthened. In addition, businesses have improved their capital structure by reducing interest costs and extending maturities. Overall debt has fallen, with 61% of global companies and 82% of Canadian companies having debt-to-capital ratios of less than 25% — and 78% of global companies and 63% of Canadian companies plan to maintain or reduce their debt-to-capital ratios further in the next 12 months.

Corporate earnings outlook is relatively strong, with almost half (47%) confident they will be at least stable; a further third believe earnings potential is positive. Funding conditions have also improved, with 68% saying capital market conditions are at the very least stable.

Surprising corporate confidence in an uncertain market

Despite concerns over weakening global growth, many of the leading companies are surprisingly optimistic about their own national economy as well as the long term global economic outlook. Two thirds (63%) of respondents feel that the global economy is at least stable. Confidence is particularly high in sectors such as power and utilities, oil and gas and metals and mining.

Emerging markets are prime targets for investment

The most attractive markets for investment according to the survey are China, India, Brazil, the United States and Australia. Outside the recognized BRIC countries Malaysia, Mexico and Argentina are the three most popular emerging market destinations for investment. More than a third of respondents said their motivation for M&A was to gain share in a new market.

IE