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Dealmaking intentions remain at record levels

Global Capital Confidence Barometer | Central and Southeast Europe (CSE) highlights | 17th edition

In our 17th Capital Confidence Barometer, executives from Central and Southeast Europe (CSE) express optimism about the M&A market as they adjust their expectations about local market growth. Despite the challenges of political and economic uncertainty in the EU, 56% of CSE companies indicate that they will actively pursue deals in the next 12 months. Moreover, 79% of them expect improving global economic growth.

Executives see global and local economies improving

Regional executives tempered their views on the state of both global and local economies, with a larger percentage expecting them to improve as compared with a year ago. For 100% of regional executives, the global economy is expected to stay at the current level or improve. They have similar expectations for the local economies. Survey participants are also expecting mostly positive growth or stable development of corporate earnings, credit availability and equity valuations at the global and local levels.

Companies focus on new opportunities for growth

CSE companies are seeking a balance between organic and inorganic routes to grow. Identifying opportunities for growth — including M&A, JVs and alliances — will be the most prominent topic for 22% of them. Our survey finds that organic growth currently remains the primary focus for CSE executives (71% versus 66% globally). In terms of inorganic growth, investors (both in CSE and globally) see more value in M&As over JVs and alliances.

Challenges to their core business, specifically the impact of digital technology and transformation to their business model (27%), and increased competition from companies in other sectors (26%), are placing additional pressure on CSE companies. Forty-three percent of our respondents think that ensuring a broader narrative to engage all stakeholders in discussions can determine dealmaking success.

For 27%, the impact of digital technology and transformation to their business model is disrupting their core business. Thus, portfolio and corporate structures are becoming more fluid since portfolio reviewing is becoming much more intense. More than one-quarter of our respondents feel the threat to their business due to competition from companies in other sectors.

Executives look to be on the front foot in the face of disruption. Whether it is the impact of digital technology on their business model, the threat from start-ups and competition from companies in other sectors, or changing customer behavior, top executives prefer a proactive approach toward these disruptors.

Nearly half of them stated that they plan to develop digital capabilities in-house, while one-third stated that hiring executives with digital expertise from inside or outside their industry is the way to go. Technology puts focus on training staff and opens up new avenues for creating jobs. Twenty-nine percent of survey participants are willing to reskill or train their employees to better respond to technology changes in the next 12 months.

M&A outlook

Dealmaking intentions remain at record levels. Fifty-three percent of top executives will actively pursue M&A in the next 12 months compared with the second-highest level of the intention that was in April 2015 (52%). Expectations toward deal market development within the next 12 months are balanced between improving (49%) and stable (48%).

Sixty-five percent of CSE executives expect no change in M&A pipeline versus 59% of global executives. Taking into account the general good condition of CSE economies, this reflects the already very high expectations within CSE countries. Regarding the main motivation for pursuing acquisitions, survey participants stated the growth in market share (32%), acquiring innovation (23%) and moving into new geographies (21%) as the key ones.

Resurgent private equity is pressuring corporate acquirers with competition for the assets. Regardless of the implicit advantage of synergies on the strategic buyers’ side, private equity groups are competing for sizeable good quality assets in the market, and are often willing to lower their internal rate of return expectations in order to successfully close the deals.

Executives look to VC to supplement their optionality

Nearly half of them engage in corporate venture capital (CVC) investments. However, the overall portion of planned acquisition capital targeted toward CVC-type investments remains low — 48% stated that this portion, within the next three years, will be 6%–10%. The main drivers for these investments are access to new capabilities and technologies (37%), and accelerating R&D and innovation (37%). Regarding processes used for overseeing start-ups and new technologies, CVC type investments are usually monitored by continuous real-time tools (41%).

Sector outlook

Technology is the most common sector in which our respondents saw the high convergence and blurring with their own. When talking about the top investment destination, the highest intention to pursue acquisitions seems to be in telecommunications (80%), technology (70%) and life sciences (69%). From a geographic point of view, CSE executives are willing to invest mainly in the US, followed by Greece, Turkey, the Czech Republic and Romania.