Five insights for board directors focusing on M&A and long-term value

Confident board members pursue growth ambitions, including M&A, even as they plan for an uncertain future.

The winds of change have shifted as a series of emerging challenges threaten to curtail global economic activity. Yet boards of directors remain undeniably confident in their expectations for growth. At the same time, they are building resilience and agility to address and adapt to whatever uncertainty the future may hold.

Based on the most recent 2019 results of the EY Global Capital Confidence Barometer, a survey of 2,900 C-suite executives globally, there are five key insights board members should consider as they steer their organizations plan for long-term value creation.

1. Board members expect significant growth, primarily from organic opportunities

According to the study 68% of board members anticipate their organizations will generate revenue growth between 6% and 15% in the coming year; whereas just two years ago board members saw a relatively even split between M&A and organic growth prospects (55% M&A vs. 45% organic). Today four in five or 81% expect to look inwardly to achieve their growth ambitions, consistent with our 2018 findings. 

2. Significant investments in technology will underpin growth efforts

One hundred percent of board members surveyed indicated their organization is planning to invest significantly in technology across a range of priorities — improving the customer experience, reducing risks (including cyber risks), improving internal efficiencies, creating new products or services, and improving financial data access and analytics.

Board members are particularly focused on deploying automation and artificial intelligence (AI) to support better and faster talent recruitment and onboarding. Which makes sense, given that: 1) board members see identifying and hiring talent among their top organizational risks to grow their business; and 2) one-third cite the need to be more agile and tap into the gig economy by hiring more contractors and freelance staff as a key priority for their organization’s employment strategy.

Continuing along the lines of looking within for optimization opportunities, three-quarters of board directors say they will develop AI capabilities for talent recruitment and onboarding in-house. Similarly, 9 of 10 say they will develop AI in-house for another top priority — increasing personalized products and services, and improving customer service. The preference for developing these capabilities in-house may in part be attributed to the need to accommodate legacy systems. More likely, however, is the recognition that it provides an opportunity to create bespoke apps that allow their organization to achieve a competitive advantage.

3. Technology and innovation is at the heart of deal strategy

A little more than half (52%) of board directors expect to pursue M&A in the next 12 months with almost one quarter saying that acquiring technology, talent, new production capabilities or innovative startups is driving deal strategy.

The impetus to pursue these targets appears to be at least partly in response to 72% of board directors seeing technological innovation as either a fundamental or very influential external trend influencing their deal strategy.

4. Valuation frameworks need to better align to a digital world

Despite their appetite to acquire digital assets, 91% of board members either strongly agree or agree that traditional valuation methodologies make it difficult to properly determine the correct value for digital companies and innovative startups.

In that context, board members should consider using sensitivity or simulation analysis to help predict the outcome of a decision using a range of variables. These insights may help them challenge the underlying assumptions that support their valuation models.

5. Proactively reshaping portfolios in response to concerns from activist shareholders

Like it or not, activist shareholders are placing increasing pressure on organizations to review portfolios more frequently with an eye on reshaping them for the future. Eighty percent of board members say that activist investors are compelling them to take specific actions to reshape their portfolios. As a result, 40% of investors say they are primarily looking for companies to make acquisitions.

Activists and other pressures see 60% of board members reflecting that their organizations now review their portfolios quarterly or more. Based on their most recent review, 24% say they identified areas where they needed to make an acquisition. A higher percentage — 27% — indicate they opted to differentially invest capital in a particular business unit. 

A look ahead

As board members look at the short-term, one quarter (26%) anticipate portfolio reshaping will continue to dominate their boardroom agenda. For 29%, increasing economic and political certainty, and regulatory or governmental intervention will remain a top priority.

Ultimately, boards need to recognize these key trends and adopt a well-defined strategy to address them, particularly as the four aspects of long-term value creation: talent; innovation; society and environment; and governance become increasingly important to stakeholder communication.

Critical questions boards should consider to make better decisions:

1. Do you know the next big thing in your industry? Boards need to understand how investments in the organization align to new and emerging strategic growth opportunities and how to capitalize on these
2. Can benchmarking help you turn up the heat on your competition? Boards should challenge management to benchmark investment areas with competitors to identify any gaps or opportunities; particularly as it relates to investment in technology
   
3. When boards look at artificial intelligence (AI), what should they see? Boards should explore and question how the organization is using AI and other technological advances to create competitive advantage and drive new growth; and measure its’ success
   
4. Are activist shareholders disruptors or advisors? Boards need a holistic strategy to educate and engage with activist stakeholders on questions around growth strategy and investment