Capital strategies being rewritten as C-Suite grapples with immediate impact of new reality, says EY

Business leaders are focussing on navigating the immediate impact that COVID-19 has across supply chains, revenue and profitability, while reconfiguring capital allocation and M&A plans for the post-crisis world, according to the 22nd Edition of the EY Global Capital Confidence Barometer (CCB22).

Almost three-quarters (73%) of respondents to CCB22, a survey of more than 2,900 C-Suite executives globally, expect COVID-19 to have a severe impact on the global economy in the form of supply chain disruption, as well as declining consumption. At the same time, executives are reviewing their operating models in response to the crisis. The increasing shutdown of activity in many parts of the world has exposed vulnerabilities in many companies’ supply chains, with over half (52%) taking steps to change their current set up and 41% investing in accelerating automation.

With just under half of global businesses (49%) reporting profit margins that are either the same or lower than two years ago even before the current crisis, the vast majority of companies (95%) are bracing for further downward pressures on margins as the global economy slows.

Steve Krouskos, EY Global Vice Chair Strategy and Transactions, says: “The human cost is the most tragic aspect of this crisis not only in terms of the lives lost, but also the number of livelihoods at risk. As business leaders respond with urgency to the unprecedented impact that Covid-19 is having globally, workforce welfare and job preservation will be at the top of their minds.

“There is no playbook for this situation and the C-Suite is reconfiguring and readjusting its response in real-time as events evolve rapidly. COVID-19 has created new vulnerabilities and unforeseen challenges. For most companies, the full impact on revenue and profitability across value chains are still highly uncertain.”

Preparing for what comes next

Many companies (72%) already had major transformation initiatives underway, triggered as a result of pressure on revenue targets and to meet profitability goals, according to CCB22 respondents.

The majority (72%) are also planning to conduct more regular strategy and portfolio reviews. Once some normality has returned, executives say that they will focus on prioritizing changes in new investments in digital and technology (43%) and capital allocation across their portfolio (42%).

Krouskos adds: “Business leaders are seeing their transformation plans paused or slowed currently. With these plans set to restart, possibly with added energy, once the situation stabilizes, executives will have to make faster moves to reimagine, reshape and reinvent their business and create long-term value.”

Post-crisis recovery points to transformation through M&A

Despite boardrooms focusing on an unprecedented global health emergency, executives are also planning their future beyond the crisis. While 54% of respondents expect a ‘U’ shaped recovery period of slower economic activity extending into 2021, 38% see a ‘V’ shaped recovery and a return to normal economic activity in Q3 this year. Just 8% foresee an ‘L’ shape recovery – a sustained recession period until economic activity returns in 2022.

With the majority of companies assuming a recovery in the medium-term, the intention to actively pursue M&A in the next 12 months remains at the elevated levels (56%) seen throughout this current deal cycle. As a result of COVID-19, global executives say they will focus more on a target’s business resilience when evaluating a transaction (38%) and are prepared to see valuations come down (39%).

Krouskos says: “The ongoing COVID-19 outbreak and its impact on major economies has not caused dealmakers to shelve their plans entirely. Deals continue to be powerful means to reshape portfolios and accelerate the transformation imperative facing CEOs.

“As the post-financial crisis period shows, the M&A landscape often enables companies to make high-quality acquisitions in a recovering market. Lessons have been learned from the 2008–12 M&A downturn which hindsight shows was an opportunity to make acquisitions of high-quality assets that would have fuelled faster growth in a recovering market.”

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