EY: Strategy reset sees C-suite plot M&A and investment path out of crisis

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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.

Andrea Guerzoni, EY Global Vice-Chair – Strategy and Transactions, says: “For many business leaders, the emergence of the COVID-19 pandemic and the resultant economic shock, have acted as existential threats to their businesses. The C-suite has responded by resetting their strategies and making far-reaching changes with a focus on transformation. These bold moves are now fueling 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.”

Florin Vasilică, EY Romania Strategy and Transactions leader: „After a year filled with challenges, M&A activity in Romania is expected to return to an upward trend in 2021. For investors, there are plenty of opportunities and the acquisitions made during this period can bring significant returns in the coming years.

For winning sectors entrepreneurs, whose businesses have demonstrated resilience and adaptability to severe economic conditions, this year can be a validating point for their business, since we can witness the start of transactions with valuation multiples similar to pre-pandemic period. For those in the sectors affected by COVID-19, who are in financial blockage or with significantly diminished financial resources, the full sale of the business or partnerships with investment funds are among the only viable solutions.

Given the excess liquidity in the market and the relatively low financing costs, it is the right time for strategic consolidations and repositioning, especially in the sectors of interest for financial investors.”

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$2.32t 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.

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 organization’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.

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