Having navigated unprecedented disruption, executives are emboldened to reset their mergers and acquisitions (M&A) and investment strategies to secure growth for their businesses in the post-pandemic world, according to the 23rd edition of the EY Global Capital Confidence Barometer (CCB23).  

Responding business leaders expect a return to pre-pandemic levels of profitability in 2021 (23%) or 2022 (44%), marking improved sentiment among the C-suite compared to CCB22 (March 2020). Executives are also scanning their geographical footprints for growth. Europe (39%) is emerging as the region anticipated to generate the most growth and opportunities over the next three years, followed by Asia-Pacific (30%) and the Americas (24%).

In terms of factors that could put growth prospects at risk, the impact of the COVID-19 pandemic remains the biggest threat for responding executives (29%). The changing global economic environment (19%) and climate change (14%), also emerge as top threats. Geopolitical challenges have forced the majority (81%) of respondents to alter their strategic investment plans in the past 12 months. Nearly two-thirds (64%) of that group delayed a planned investment and more than a third (36%) terminated their plans altogether.

As the C-suite plans for a post-pandemic business landscape, the majority of respondents (86%) say that they conducted a comprehensive strategy and portfolio review in 2020. For two-thirds (66%) of that group this was unplanned and a direct response to changing events, according to the findings.

“For many business leaders, the emergence of the COVID-19 pandemic and the resultant economic shock, have acted as existential threats to their businesses," said Andrea Guerzoni, global vice-chair – Strategy and Transactions at EY. "The C-suite has responded by resetting their strategies and making far-reaching changes with a focus on transformation. These bold moves are now fuelling an optimistic mindset and a strategic agenda firmly focussed on capturing growth opportunities. Companies plan to not only restore performance levels, but to also make the necessary investments to reframe their future.”

C-suite sees route to growth through M&A and investment

Despite a collapse in M&A in the first half of the year, deal making in 2020 reached the highest transactions value on record in the second half. Global M&A value reached US$2.32 trillion in H2 2020 and transactions’ activity rebounded by 123% between H1 and H2.

Heightened deal activity looks set to continue with nearly half of responding business leaders (49%) planning to acquire assets in the next 12 months, beating the 11-year average (47%), according to CCB23. In addition, nearly two-thirds of executives (65%) plan to acquire cross-border targets, as they look to enhance capabilities and products needed for growth. Financial services, telecommunications, technology, automotive and life sciences top the list of the most acquisitive sectors.

The C-suite is looking to M&A to build resilience in their companies’ operations and navigate emerging concerns about tariffs and trade flows (26%). In addition, acquiring the technology, talent, new production capabilities or innovative startups (25%) to secure growth and the effects of sector convergence (21%) will also drive strategic acquisitions.

In the post-pandemic M&A landscape, the resilience of assets emerges as a key focus for many responding executives (19%), as does the target’s digital and technology strategy (18%); and whether or not acquirers stand to gain market share through consolidation (15%.)

Pressure for assets is expected to remain intense, with four-fifths of respondents (80%) anticipating greater competition of which more than two-thirds (67%) expect it to come from private capital.

Looking at investment plans, mitigating the long-term impact of the pandemic-induced economic slowdown remains the biggest strategic priority for executives (22%). As a direct result of the pandemic, almost two thirds (63%) of respondents plan to increase investment in technology and digital capabilities, while 57% will boost investment in customer engagement.

“Conditions for M&A remain highly supportive, including low interest rates, accommodative capital markets and abundant private capital," commented Guerzoni. "Executives are seeking to acquire innovative startups and tech-enabled competitors that will allow them to get closer to their customers and to use the digital channels and touch-points that have proved vital for leading companies during country lockdowns.”

Executives prepare to take investment plans global

With cross-border M&A staging a recovery toward the end of 2020, executives are focussing on markets outside their region. Europe has emerged as a focal point for most businesses, with the majority of respondents from North America, Asia-Pacific and the Middle East and Africa citing it as their organisation’s main focus for M&A outside their region in the next 12 months.   

Individual markets continue to present opportunities for dealmakers with Germany ranking as the primary destination for global dealmaking in 2021 for the first time. The US (second), the UK (third) and France (fourth) continue to showcase strong foundations, while India (fifth) re-enters the list of top five destinations for M&A for the first time in five years.

"Businesses recognise that acting globally is critical to building a sustained recovery and remain focused on expanding their geographic footprint," added Guerzoni. "That is why they remain focused on acquiring assets across different markets and expanding their geographic footprint. Europe may be seen as a counterintuitive source of opportunity and growth in the near term, but starting from a lower base means Europe has greater headroom to bounce back as economies re-open. Business leaders, however, will be looking at individual markets and timing their investment moves to specific circumstances in each country.”

The treasurer's role in managing risk

 

With the C-suite looking to expand geographically with M&A and investments, the treasurer will have a key role to play in ensuring that the risks that come with such moves are managed successfully. As noted in a blog last month by Kyriba on its website: 

"When a company decides to operate in a new country or region, there’s a lot of implicit risk. In addition to operational and financial processes, CFOs and treasurers must exercise a level of diligence and attention to detail - and anticipate that any one error or omission could have significant consequences."

As well as liquidity risk and operational risk, global expansion also brings currency, regulatory and political risks for treasurers to manage and also advise the board and senior management about. The Kyriba blog also included a handy checklist for treasurers of firms that are establishing new country operations:

Cash management

• Conduct a bank fee analysis.
• Setup (or expand) banking relationships.
• Establish bank connectivity and ensure automated format transformation.
• Ensure automated account balance and cash visibility.
• Confirm payment structure and cross-border latency.
• Set up processes to extend into your existing cash pooling structure.
• Establish cash forecasting scenarios.

Risk management

• Set up new currency and FX policies and procedures.
• Establish automated processes to measure and mitigate currency exposure.
• Establish controls and policy in the context of new country constraints and regulations.
• Ensure payment and other fraud detection technologies are in place.

Working capital

• Determine cash and liquidity objectives for in-country operations.
• Consider a supplier financing programme, such as dynamic discounting or reverse factoring.