5 minute read 10 May 2019
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Eurozone companies take charge of their destinies with help from M&A

By

Andrea Guerzoni

EY EMEIA Transaction Advisory Services Leader

Advising Boards and CEOs on transformational deals from strategy through to execution. Leader of the EY EMEIA Transaction Advisory Service line. Innovator and team player.

5 minute read 10 May 2019

Despite a downbeat outlook from economists, Eurozone companies express confidence in their double-digit growth and M&A ambitions.

In April 2019, for the fourth time in 12 months, the International Monetary Fund (IMF) cut its outlook for global growth. The IMF then went one step further, suggesting that 2019 would see the weakest growth rate since the financial crisis in 2009.

The IMF report compounds other economic and analyst forecasts that have captured headlines lately, painting a gloomy picture of economic times to come. Yet Eurozone executives are choosing to embrace another, more proactive view that reflects their positive perspective on key market fundamentals. Overall, Eurozone executives are looking to build resilience into current operations and create a foundation for future growth that doesn’t rely on economic tailwinds. In doing so, Eurozone executives are taking charge of their own destinies to achieve their double-digit-growth ambitions.

Eurozone executives power ahead with aggressive growth plans

According to the EY Global Capital Confidence Barometer, 95% of Eurozone executives expect global economic growth to improve, an increase of 15 points from a year ago. The rise in confidence for growth in local economies is even greater, jumping from 70% in April 2018 to 96% in April 2019. If these were the only positive numbers, we could dismiss them as anomalies. Instead, Eurozone executives express increasing confidence across a spectrum of market fundamentals, with more than 80% anticipating global improvements in corporate earnings, short-term market stability and credit availability. Within the Eurozone, optimism in these areas rises above 90%.

Based on their strong confidence, Eurozone companies are powering ahead with aggressive growth plans. More than half (55%) anticipate double-digit top-line growth in the year ahead. While nearly three-quarters (72%) expect growth to come from within, a little more than a quarter (28%) are looking at inorganic opportunities to help them reach their growth targets.

Confidence in near-term growth

55%

of Eurozone executives expect double-digit growth in 2019.

Although Eurozone executives are proactively optimistic, they are not blind to downside risks

Despite increasing confidence in their growth ambitions, Eurozone executives are aware that there are a range of issues that could put their growth plans at risk. One-third see slowing economic activity (the very issue being predicted by economists and analysts) as the greatest external risk to the growth of their business. Internally, increasing production costs, exacerbated by an ever-tightening labor market, which is creating challenges in identifying and hiring talent and forcing up wage bills, are the top challenges that could hamper growth plans.

To address their labor challenges, one-third of executives (33%) are looking to hire more contractors and freelance staff. This strategy offers the triple benefit of enabling organizations to fill labor gaps (at least in the short term), remain agile in a constantly evolving landscape and reduce overhead and administrative costs — a primary focus for nearly half (47%) of executives who are looking to build resilience into their organization’s cash flow. A quarter (26%) are planning on maintaining current staffing levels.

Growth risk

33%

of Eurozone executives expect to hire more contractors and freelancers to address labor shortages that could impede growth.

Eurozone executives are also turning to technology, automation and artificial intelligence (AI) for routine processes that can help to free up existing resources to focus on more strategic issues, which is consistent, if slightly behind, the global executive perspective.

Eurozone companies have picked up the pace in assessing their portfolios, but they lag behind their global peers

The speed of disruption is compelling Eurozone executives to examine their portfolios for risks and opportunities more frequently than they did previously. However, they should be asking themselves: are we moving fast enough?

Company portfolios are the foundation upon which executives make their strategic decisions. Building agility and resilience into their strategy is therefore shifting the frequency with which executives review their portfolios and determine whether they need to change course immediately. However, where more global companies are assessing their portfolios quarterly (41%) rather than every six months (31%), Eurozone companies are lagging, with 32% reporting quarterly assessments, while more (38%) are satisfied with semiannual reviews.

If active portfolio reshaping allows executives to increase value creation by identifying areas of potential underperformance or opportunities to get ahead of their competitors, Eurozone executives may want to consider picking up the pace of their portfolio reviews.

Eurozone portfolio review

Buoyed by an enthusiastic outlook, M&A intentions reach a record high

Although many Eurozone companies are predominantly focused on organic growth, 71% say their companies are actively pursuing M&A in the next 12 months — a record high since the Global Capital Confidence Barometer began 10 years ago. For more than 90%, their enthusiasm is supported by a confidence that the M&A markets, globally and locally, will improve in the next year.

M&A outlook

71%

of Eurozone executives expect to actively pursue M&A in the next year — a record high.

With strategic priorities spread almost evenly across expanding their business into adjacent sectors, developing new products and services, and expanding their existing business within their domestic market, Eurozone executives expect deal pipelines to increase in the months ahead. Additionally, as timelines for identifying and buying assets have become compressed by rising competition for the most sought-after assets, active pipeline management is now a must-have for executives.

Geographically, as their strategic priorities suggest, Eurozone executives are looking close to home for the right M&A opportunity. Four of the top five destinations are in Europe, with the UK their No. 1 choice, possibly prompted by the imminent departure of the UK from the European Union. Ranking fourth, the US is the one outlying destination Eurozone executives have in their sights.

Eurozone executives are also bullish on deal completions, with 85% expecting to close more deals in the next 12 months, up from 70% a year ago. However, they remain conscious that one of their biggest risks remains the integration of operations and people — a particularly delicate part of the transaction they need to get right given the need to find and retain scarce talent.

The future looks bright

While Eurozone executives are aware of the economic risks, they are choosing to pay more attention to performance within their markets, which is markedly more optimistic. They are also choosing not to rely on economic growth for their own growth. Instead, they are looking to chart their own destinies, proactively strengthening their current operations while preparing to seize the upside of disruption so that they can thrive well into the future.

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.

About this article

By

Andrea Guerzoni

EY EMEIA Transaction Advisory Services Leader

Advising Boards and CEOs on transformational deals from strategy through to execution. Leader of the EY EMEIA Transaction Advisory Service line. Innovator and team player.