Most See Third Quarter Recovery

Ernst & Young (EY) has published its latest Capital Confidence Barometer (CCB) that finds business leaders focusing on the impact of COVID-19 on supply chains, revenue and profitability, while also reconfiguring capital allocation and M&A plans for the post-crisis world.

According to the CCB, which surveyed more than 2,900 global C-Suite executives, almost three-quarters (73%) of respondents expect COVID-19 to have a severe impact on the global economy in the form of supply chain disruption, as well as declining consumption. In response, and to no one’s surprise, these executives are reviewing their operating models in response to the crisis which has exposed vulnerabilities in many companies’ supply chains.

Half of the survey’s business leaders (49%) reported that profit margins are either the same or lower than two years ago even before the current crisis, and the vast majority of companies (95%) are bracing for further downward pressures on margins as the global economy slows.

“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,” said Steve Krouskos, EY Global Vice Chair Transaction Advisory Services. “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.”

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 CCB respondents. “Business leaders are seeing their transformation plans paused or slowed currently,” added Mr. Krouskos. “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.”

What Kind of Recovery?
Most respondents (54%) 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%).

“The ongoing COVID-19 outbreak and its impact on major economies has not caused dealmakers to shelve their plans entirely,” said Mr. Krouskos. “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 fueled faster growth in a recovering market.”

The CCB was conducted in February and March and surveyed more than 2,900 executives in 45 countries; 70% were CEOs, CFOs and other C-suit-level executives. Respondents represented 14 sectors, including Financial Services, Consumer Products and Retail, Technology, Life Sciences, Automotive and Transportation, Oil & Gas, Power & Utilities, Mining and Metals, Advanced Manufacturing and Real Estate, Hospitality and Construction. In addition, surveyed companies’ annual global revenues were as follows: less than $500 million (25%), $500 to $999 million (25%), $1 to $3 billion (18%), $3 to $5 billion (10%) and greater than $5 billion (22%). Company ownership was as follows: publicly listed (57%), privately owned (31%), family-owned (9%) and private equity portfolio company (3%).

EY is a provider of assurance, tax, transaction and advisory services. The firm has over 270,000 employees in more than 700 offices in 150 countries.

Private Equity Professional | March 31, 2020

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