4 minute read 18 Mar 2021
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Market conditions are ripe for M&A as Eurozone prepares for growth

M&A will likely play a prominent role in strengthening European company growth in the coming months, but only for those who are most prepared.

In brief
  • Eurozone companies have had a year of unprecedented challenges and continue to navigate uncertainties related to the pandemic and ongoing geopolitical issues.
  • But as C-suites reframe their growth plans for the post-pandemic era, apprehension turns to optimism as M&A and investment strategies get a reboot.

Eurozone executives reset their corporate and investment strategies based on increasing optimism for growth opportunities in 2021 and 2022. According to the latest edition of the EY Global Capital Confidence Barometer (CCB) (pdf), the vast majority of Eurozone companies experienced significant decreases in revenue and profitability because of the pandemic. Yet, there is optimism that these declines are temporary, with respondents expecting a return to pre-pandemic levels of profitability either later this year (24%) or in 2022 (40%).

Looking to seize upon lessons learned from the pandemic, executives are preparing to make radical changes to the fundamental features of their businesses. A greater focus is being placed on portfolio transformation and reorganization as they seek to optimize their growth strategy for a post-pandemic world.

More than three-quarters of Eurozone respondents (77%) have conducted comprehensive strategy and portfolio reviews during the pandemic. For two-fifths of respondents (40%), the reviews were unplanned and in direct response to changing events.

Corporate strategy and operations

77%

of Eurozone respondents say they conducted comprehensive strategic and portfolio reviews in 2020.


This strategic reset has fueled optimism about future growth. Fifty-eight percent of executives are planning to increase investment in technology and digital capabilities, with 63% intending to boost investment in customer engagement. With M&A firmly on the table as a route to growth, 52% say they expect to pursue acquisitions in the next 12 months.

How would the coronavirus event affect your decisions?

Executives look to apply (hard) lessons learned from the global financial crisis (GFC) to M&A strategy

Amid the challenge and uncertainty that the pandemic has brought, Eurozone companies see M&A as an optimal route to transformation. This approach is vastly different from the path companies pursued at the height of the GFC between 2009 and 2011. During that crisis, companies took a much more defensive stance and remained cautious in their growth strategy. More than 10 years later, deal values for the Eurozone have yet to recover from the remarkable pre-crisis levels between 2006 and 2008.

Despite the collapse in M&A numbers in the first half of 2020, Eurozone companies bounced back with vigor in the second half of the year, recording one of the largest rebounds on record. This suggests that lessons were learned from the GFC – that a downturn is an ideal opportunity to acquire high-quality assets that can fuel faster growth in a recovering market.

Based on M&A intentions over the next 12 months, this heightened deal activity is likely to continue with executives considering M&A as a means to building operational resilience, growing into adjacent or new markets and new strategic capabilities.

Is your company currently undergoing a significant business and technology transformation program?

In terms of where Eurozone executives are looking for deals, 61% are seeking assets globally rather than domestically as they look to enhance the capabilities and product offerings required for growth.

The route to growth follows a global path

In the decade since the GFC, Europe has been the laggard in the global economic landscape. It has trailed the US, China and South-East Asia as a source of the growth propelling global economic activity. However, as economies open, Europe may be at the forefront of the rebound. Because it is starting from a lower base, it has greater headroom for a rebound.

Is there a difference in your current strategy review process compared with three years ago?

The CCB corroborates this positive outlook for the Eurozone. Within the Eurozone itself, confidence is high with 91% of respondents anticipating Europe will generate the most growth and opportunities for their companies in the next three years. And globally, 39% of respondents cite Europe as a focal point for M&A outside their region in the next 12 months, the highest of any region.

What is the biggest difference

With Germany and France in the top five global investment destinations, inbound investments dominated the cross-border deal landscape in the Eurozone in terms of deal volume, with around 77% of executives expecting an increase in cross-border dealmaking in the next 12 months. With optimism comes caution, however, as geopolitical uncertainty is never far away. And with increasing regulatory and government intervention in M&A expected by more than 80% of executives in the months ahead, post-pandemic recovery is likely to benefit those companies that are most prepared.

M&A market outlook

81%

of Eurozone respondents agree that there could be more regulatory or governmental intervention in M&A in the next 12 months.

Eurozone executives need to prepare to catch the M&A rebound

Now is the time for Eurozone companies to fast-track their preparation for an improved post-pandemic world. Market conditions are ripe for M&A, and those companies most diligent in their portfolio and strategic reviews are best positioned to take advantage of the rebound. With an appetite for the upside and lessons learned from the GFC, M&A looks likely to play a prominent role for Eurozone companies looking to strengthen growth and competitive edge in the months and years ahead.

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.

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