The current crisis has shown that companies must accelerate their digital transformation agenda. In the future, not having a functioning digital business model will not pass muster.
Looking beyond, M&A transaction appetite will grow
Even though there is a risk to profitability, German respondents recognize opportunities for favorable acquisitions. More than one-quarter (26%) said they have plans to expand their market share through M&A, while four in 10 (40%) are expecting that shrinking valuations will make potential acquisition targets more attractive. Further, 76% say they expect an increase in cross-border dealmaking in the next 12 months.
Around the world, companies are keeping a particularly watchful eye on the M&A market. In the acute phase of the COVID-19 crisis, interested buyers may hold back initially. However, declining valuations will likely lead to a significant increase in M&A activities. Post-financial crisis, many companies were risk averse and chose not to pursue M&A. They have learned a valuable lesson from that experience. In particular, we expect portfolio companies will weather the crisis better. Compared to closely interconnected competitors, portfolio companies are more open to alliances and joint ventures, and can be more willing to divest of assets or spin off business divisions. In fact, 88% of German companies are finding more opportunities for divestitures as part of their strategic review processes than they did three years ago.
Executives will have to adjust to a different business environment
Amid an ongoing sea of uncertainty and with customers shifting their behaviors, likely forever, German companies will have to adjust to a “new normal.” They will have to rethink their supply chains, either by moving from global to local, or by evolving from a linear to data-driven, cloud-supported networked supply chain. Some companies with higher debt levels may also consider divesting assets. A look back at the 2009 financial crisis provides a roadmap for German companies to follow in the future: companies that react in a planned, considered and bold manner now, will have the resilience to emerge stronger as economies locally and globally recover.
Five critical questions German companies should ask to build business resilience and develop a recovery roadmap
- How can you operate in a business-as-unusual environment? German companies need to expect future crises and plan accordingly. Scenario-planning incorporating lessons learned from COVID-19 will help German companies build their resilience.
- Do you know your portfolio’s weakest link? For some German companies, profit margins and revenue generating capabilities were stressed before the pandemic crisis. To withstand shocks and create optionality, German executives need to examine their portfolios for liquidity vulnerabilities.
- Can you look beyond the immediate crisis to see the next steps? More frequent strategy and portfolio reviews are a mindset as much as an event. German executives need to develop systems that can pivot quickly as circumstances change.
- Are you prepared for a new environment? The post-crisis environment may be very different from what happened before. German executives need to be bold in their strategic decision-making to take advantage of new market dynamics.
- How can you learn from the past to be bolder in the future? Companies that made bold acquisitions in the immediate post-global financial crisis period outperformed peers over the next decade. German executives need to be ready and able to make the deals that will supercharge growth.
Summary
The EY Global Capital Confidence Barometer (pdf) gauges corporate confidence in the economic outlook and identifies boardroom trends and practices in the way companies manage their Capital Agendas.
