Our 15th Capital Confidence Barometer finds CSE executives are adjusting their expectations against a backdrop of ongoing volatility in capital markets, a slowdown in global trade flows and political instability. Despite these challenges, 43% of CSE companies expect to actively pursue M&A in the next 12 months.
CSE executives continue to express confidence in the economy
For almost 80% of CSE executives, the global economy looks to remain stable or see modest improvements over the next 12 months. They have similar expectations for the local economy.
Economic fundamentals support this perspective, with almost half of CSE executives expressing confidence in corporate earnings at the global and local level. However, the responses show decline in credit availability. Tighter credit markets may be influenced by concerns over the quantitative easing policies of the European central bank and central banks of CSE countries.
Political stability poses the biggest economic risk to both the core business and M&A strategy
Despite the confidence CSE executives express in the economy, there are a number of factors that are tempering their enthusiasm. At 35%, CSE executives see the biggest challenge impacting their core business to be political uncertainty, while 30% see it posing a risk to their M&A strategy.
The UK’s decision to leave the EU, the recent outcome of the US election, and the upcoming elections across Europe, are examples of the types of political shifts occurring across the globe that may impact consumer relationships and cross-border supply chains for CSE companies. They may also increase the uncertainty around tax and trade policy. Identified by 29% of CSE respondents as the second most important risk to M&A strategy is a slowdown in global trade flows, connected to the rise of economic nationalism and protectionism.
CSE companies prioritize organic opportunities to accelerate growth
In terms of disrupters, sector convergence and increasing competition from other sectors (27%), as well as changing customer behaviors (27%) top the list.
In an effort to boost revenue in a disrupted, politically uncertain, low-growth environment, companies are looking at both organic and inorganic opportunities. Although 63% of CSE companies are focusing on organic growth to propel them forward (versus 55% of global respondents), a healthy minority are concentrating on a mix of M&A, joint ventures (JVs) and alliances to help them take advantage of a changing industry landscape.
Considering the increasing disruption and complexity of the business environment, almost a third of CSE boards place identifying opportunities for inorganic growth at the top of their agenda during the next six months.
M&A appetite has CSE companies looking for deals that address changing customer behaviors and growing market share
This confidence in the deal market is supported by the 34% of CSE executives who expect the M&A market to improve at the global level in the next six months. Domestically, 28% of CSE companies expect the M&A market to accelerate, a vast improvement from six months ago when only 9% felt the same way.
As a result, CSE companies are filling their pipelines, with 42% suggesting that they have five or more deals on the go (versus 17% in April 2016) — a number 42% expect will grow in the next year.
With respect to the type of deals CSE executives are looking for, intra-regional destinations and deals outside their core sectors as a reaction to changing customer behavior (46%) seem to be key priorities. Within their current sector, 41% of CSE executives are contemplating acquisitions that will help them to increase their market share.
CSE companies find Turkey the most attractive destination for investment
Given concerns relating to Brexit, the UK is no longer among the top investment destinations of CSE executives. With CSE companies determined to stick close to home, the most attractive destinations for deals according to CSE executives comprise Turkey, Czech Republic, Germany, Romania and Greece.
Regardless of the deal structure, executives are looking to acquire assets that will help them deal with the creative disruption that has become part of the fabric of business life. As pipelines continue to fill with smaller-sized deals that can help fill gaps in their core business and address disruptive trends, we expect the deal landscape across the CSE region to remain robust well into 2017.
EY CSE Transaction Advisory Services Leader
+356 213 42134
Download Central and Southeast Europe highlights (PDF)