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Balancing organic growth with M&A activity

Global Capital Confidence Barometer | Czech Republic

In our 15th Global Capital Confidence Barometer, Czech executives express cautious optimism about the M&A market as they adjust their expectations about local market growth. Despite the challenges of a slowdown in global trade flows, as well as political and economic uncertainty in the European Union (EU), 41% of Czech companies indicate that they will actively pursue deals in the next 12 months.

Czech executives see global and local economies as stable to improving

Czech executives tempered their views on the state of both global and local economies, with a larger percentage expecting them to remain stable as compared with a year ago. For 87% of Czech executives, the global economy is expected to stay at the current level or improve.

They have similar expectations for the local economy. Czech executives are also expecting mostly positive growth or stable development of corporate earnings at the global and local levels.

That said, there are a few factors affecting economic growth. Czech executives see economic and political instability in the EU as the most significant challenge affecting their business. High volatility in currencies (Czech versus foreign), commodities and capital markets, and a slowdown in global trade flows are also having an impact.

Czech companies focus on new opportunities for growth

In an increasingly disrupted and persistently low-growth environment, Czech companies are seeking a balance between organic and inorganic routes to growth. Our survey finds that organic growth currently remains the primary focus for Czech executives (67% versus 55% globally). In terms of inorganic growth, investors (both in the Czech Republic and globally) see more value in M&As over JVs and alliances.

Challenges to their core business, specifically changing customer behavior and expectations (26%) and industry regulation (25%), are placing additional pressure on Czech companies. For 23%, sector convergence and increased competition from companies in other sectors are further disrupting their core business. At the board level, Czech executives are making the impact of digital technology on the business model and identifying new opportunities for growth, including M&A, JVs and alliances, their top priorities.

In addressing advances in technologies in particular, Czech companies are zeroing in on talent. They expect to shift skills and talent within their business to gain efficiencies from greater automation and create jobs or hire new talent.

With pipelines full, Czech companies focus on smaller-sized deals to fill critical gaps

With improving confidence in the stability of the M&A market, deal appetites are on with rise, with 44% of companies having five or more deals in the pipeline (versus only 9% in October 2015). More than two-thirds expect their pipeline to increase over the next 12 months.

Further, the number of acquisition opportunities is expected to rise both globally and domestically as Czech companies shift their attention toward smaller-sized deals to fill critical gaps in their portfolios and acquire niche technology assets to help them gain a competitive advantage.

In terms of where they want to invest, Czech executives identify countries close to their home market as most attractive, followed by Germany, China, the US and Slovenia. When looking outside their sector, 67% are pursuing deals in reaction to changing customer behavior. Within their own sector, Czech executives are driven mainly by the aim to acquire technology or new production capabilities (37%).

Outlook for 2017

Looking into 2017, as pipelines continue to fill and Czech companies seek to increase revenue and accelerate growth in a low-growth environment, we expect Czech executives to continue their focus on acquiring assets that will help them deal with the creative disruption that has become part of the fabric of business life.

EY - Peter Wells

Peter Wells

Head of Transaction
Advisory Services
Czech Republic

+420 225 335 254

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