How much of a priority are M&A deals compared to three years ago?
Base: All (245) ANZ (111) Asia (134)
“The concern is, in their efforts to boost margins, companies will end up cutting away muscle as well as fat.”
Ernst & Young
The market may be uncertain, but some things never change. Constant issues on the CFO’s agenda include financial reporting and capital management, with 65% of respondents citing these two areas as receiving the same priority and resources as three years ago.
Clearly, control and reporting are lines that cannot be crossed, no matter how volatile the business environment. CFOs must fulfil their fiduciary responsibilities to control and manage the financial aspects of the business.
Regulatory compliance and investor relations also remain constant priorities, with 61% of CFOs seeing no resourcing shift for these activities. That said, 32% said regulatory compliance required far more time and resources. Typically, this response was skewed by industry. For example, many respondents in the finance industry are having to fund expensive, mandatory, regulatory-driven projects.
However, across the region, the biggest shift in CFO priorities is to cost management, cash flow and better risk management, which CFOs see as key to building a sustainable business model.
Mergers, acquisitions and other funding priorities
Interestingly, while 59% of CFOs are giving M&A deals the same priority as they did three years ago, across the region, 24% have put deals on the back burner. There are some regional differences when it comes to increased focus on deal activity with only 9% of ANZ-based companies prioritising more deals, compared with 25% of Asia-based companies.
This reflects appetite for growth through acquisitive strategies in Asia, compared to a more conservative approach by ANZ boards and management, who are shifting their focus from investing and optimising capital to preserving relatively high levels of cash.
In financial services and the property sectors in ANZ, the appetite for deals is low due to reduced confidence caused by volatility in the share market and the difficulty in pricing an acquisition accurately, causing a wait-and-see attitude. This is also compounded by the need to conserve cash, making organic growth a more viable and less risky option and an easier position for boards and management to sell to shareholders and the market.
However, companies with confidence in their longer term strategy and the courage to make prudent purchases may well find this an ideal time to act and get ahead of the competition, while competitors wait for more certainty.
Refinancing efforts during the global financial crisis have consistently left balance sheets stronger, with a quarter of CFOs reporting fewer resources being directed towards fund-raising.
Yet, with banks routinely taking at least 12 months to approve re-financing, many companies with large debts will start this process again now.
CFOs must help their organisations make hard choices between short-term cuts and long-term value.
With growth levels flagging, cost efficiencies are now an imperative. Many CFOs are planning another raft of enterprise wide cost-cutting, to remove excess costs that exist after the post-global financial crisis round of belt tightening. Arguably, the organisations that survive this process will emerge as leaner, nimbler and more sustainable. Inevitably, reducing head count will be among the cost cutting strategies considered.
At the finance department level, the pressure to reduce costs is going beyond shared services, to the point where boards must make ‘fork in the road’ decisions about the future role of finance. Will they downgrade finance by paring back spending to an absolute base minimum, or continue to invest in the skills and technology to enable CFOs to retain their role as business advisors?
Clearly, if finance is down-sized to a control and compliance function, valuable business and analytical skills will be lost. One of the dangers of cutting finance back too aggressively is the resulting increase in shadow finance organisations.
The moment individual business units start doing their own financial reporting, the organisation begins to operate with two or more sets of reporting. This is both inefficient and undermines corporate strategy. Business units will make decisions with ‘their’ numbers, resulting in confusion and, often, a failure to deploy resources effectively to meet organisational goals.
Such choices — between paring to the bone or sustaining value — will abound through the organisation. Organisations need to be very sure they aren’t cutting too much.
Hoarding cash is not a long-term solution. Without investment, businesses will lose their capacity for growth.
Cash is king, with 56% of the region’s CFOs seeing cash flow as an increasing priority. Aware that cash flow is the first thing to suffer as economic conditions deteriorate, many see cash as the key to taking advantage of business opportunities and keeping the business moving forward.
However, CFOs know they still have to generate cash through fundamentals, not short-term fixes. Their focus on capital management has not changed. They are looking for longer-term opportunities to generate sustainable cash flow — not just one-off wins from great capital management discipline.
This is in sharp contrast to the period during and immediately post-global financial crisis, when most companies were focused on improving balance sheet strength to demonstrate their ability to weather the storm.
Capital preservation... at what cost?
Today, the market’s excitement over balance sheet strength is waning. The new heroes are liquidity and cash. Under acute pressure to demonstrate forward cash flows, companies are holding on to cash until the outlook becomes more certain, rather than using it to invest in growth.
Consistent with the sentiments of the surveyed CFOs, Ernst & Young’s bi-annual Capital Confidence Barometer, released in October 2011 found 30% of Australian corporates were focused on preserving capital. While this position is understandable, the downside may be missed opportunities.
Eventually, companies must invest in the projects that will help them grow their business. However, this will take some bold moves by leaders who have good relationships with their banks or are prepared to back their own investments.
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