- UK CEOs say M&A remains a critical strategic option to respond to rapid change
- 66% expect to pursue transactions, even after a period of intense deal activity
- ESG is one of the biggest strategic challenges for UK CEOs, but most companies have encountered investor resistance to their sustainability plans
- Almost all UK CEOs reported an increase in costs and supply chain disruption
- Over 50% of respondents are focusing investment capital investment on long-term growth initiatives
Most UK corporates are expecting to accelerate investment and undertake mergers and acquisitions (M&A) this year, according to the findings of the inaugural EY 2022 CEO Outlook Survey.
The survey revealed that UK CEOs are responding to the immediate challenges thrown up by the pandemic, whilst taking bold decisions to build long-term value. It found that appetite for M&A by UK CEOs remains strong, with two-thirds of respondents (66%) expecting to transact in the next 12 months, compared to 59% globally and 57% of executives surveyed last year. The UK remains the second most attractive inbound destination for deals globally, behind the US, particularly in sectors it has global strengths, including financial services, fintech and high-end consumer and industrials.
The CEO Survey also revealed that UK companies are anticipating a significant amount of private equity (PE) activity, with 45% of UK CEOs expecting strong competition from PE buyers in the deal market, compared with 21% globally.
Steve Ivermee, UK&I Strategy and Transactions Managing Partner at EY, comments: “For many companies, M&A remains a fundamental part of how they act on and deliver on their strategic growth plans. From rationalising their portfolio, to digital transformations and improving their ESG profiles, companies are using deals to reshape their business at pace. Given the intense level of deal activity we’ve seen in the last two years, many companies will be integrating recently acquired assets, but UK CEOs are still signalling that they remain strategically poised to buy assets that support their growth ambitions.”
Focus on ESG creating CEO tension with some investors
UK CEO responses indicate that environmental, social and governance (ESG) is now an integral part of corporate strategy, which cuts across every aspect of decision-making. UK CEOs are giving this topic even sharper attention than their global peers, with 98% of UK CEOs expecting ESG to be an important value driver, compared with 83% globally. Its strategic importance means 7% of UK CEOs have walked away from a deal because they have ESG concerns.
However, investors don’t always share this understanding, 70% of UK respondents admit they have encountered resistance from investors and shareholders about their sustainability transition strategy, of which 42% say their shareholders want them to wait for competitors to act first – in direct contrast with CEO’s strategies to lead their markets.
Steve Ivermee continued: “We’re seeing this tension develop now, with some company stakeholders pushing for companies to move faster, whilst others are calling for a stronger focus on immediate returns. CEOs will need to address this friction and increase stakeholder engagement around ESG topics, constantly updating their narrative to ensure that they can fully articulate the benefits of their strategy and respond to any concerns quickly.”
Reshaping to protect and grow
UK CEOs identified the pandemic as a significant catalyst for corporate transformation - over 90% of UK respondents said that COVID-19 had affected their sector and over a third expected this change to be fundamental.
However, alongside this imperative for change, CEOs are also handling many other strategic challenges, including energy prices, supply chain disruption, and material and labour costs and shortages which became major problems for companies in a matter of months in 2021. Almost every UK CEO in the survey reported an increase in costs and the need to adjust their supply chain in response to disruption and geopolitical challenges. As a result, over 88% of companies are altering their supply chains or geographical profile - with over a third of UK CEOs accelerating cross-border investment.
The survey also indicated that over 50% of UK CEOs will be directing capital investment towards their organisation’s growth engines or entirely new ideas in the next five years, demonstrating willingness to make bold moves in the face of change and to look towards a longer horizon. Digital transformation also remains a key priority with over 50% of UK CEOs using technology as their main strategic driver to improve margins, either through automation or technologies that increase customer engagement to develop new data-driven products and services.
Steve Ivermee added: “CEOs are taking action to mitigate against short-term pressures, whilst also acting to reshape their businesses, build resilience, and create a more stable platform for growth. The last two years have been a period of intense change. Businesses need to review the profile of their business and its wider ecosystem to position themselves successfully for the future.”