For US companies, M&A will help drive growth in 2018
CEOs of US-based companies are much more likely than their counterparts around the world to pursue new mergers and acquisitions in 2018, according to PwC’s latest annual CEO survey.
While US CEOs have expressed stronger M&A interest than CEOs globally in past years, the gap is widening. Global CEOs’ appetite for deals in the 21st CEO Survey was essentially flat from last year, remaining well below 50%. Meanwhile, more than two-thirds of US CEOs see deals as a path to improving profitability and growth – a surge of 14 points from last year.
The striking difference from both global CEOs this year and US CEOs last year may be attributable to a few different factors captured in other survey findings, including confidence in growth, the need to keep up with technology and the availability of capital.
Although US CEOs voiced concern about an increasingly fracturing world, they’re more optimistic than in recent years about their companies’ prospects for growth.
Compared to only a slight increase globally, US CEOs’ confidence swelled in their organizations’ prospects for higher revenues in 2018. Those who said they’re very confident about revenue growth jumped from 38% a year ago to 52% now – the highest in a decade. Only 5% said they aren’t very or at all confident, down from 12% in the previous survey. That growth may come organically, but additional revenues could put companies in a better position to expand further through deals.
Executive confidence is evident in multiple sectors, as the latest PwC Deals Industry Insights shows. Some of that business growth may come through deals across borders, as companies consider how to navigate potential trade barriers and other obstacles to providing goods and services in other markets.
When asked about global trends that can affect business, most CEOs think the world is moving more toward regional trading blocs and away from a single global marketplace, and toward nationalism instead of political unions. They also see a rise of multiple economic models instead of economic unions and unified models, as well as more use of tax competition vs. harmonization of global tax rules. All of this could feed cross-border M&A as CEOs try to secure footprints in key markets.
Technology and capabilities will be another deal driver, with CEOs increasingly concerned about their companies losing an edge in the digital age.
Since 2013, the number of US CEOs concerned about the speed of technological change, the threat of new entrants, cyber threats and the availability of key skills has risen more sharply than other concerns, such as over-regulation, protectionism and energy costs. In the latest survey, 41% of US CEOs said changes in core technologies will be very disruptive to their business over the next five years, compared with 32% of CEOs globally. This helps explain the growing interest across the industry spectrum in acquiring technology; 2016 was the first year in which the number of tech companies acquired by companies in other sectors exceeded those acquired by other tech companies, according to Bloomberg data.
Making such deals requires capital – another area where US CEOs remain positive. Among 15 potential economic, policy, social and environmental threats listed in the survey, the cost of capital was at the bottom. Only 7% were extremely concerned about access to affordable capital in 2018, while 60% weren’t very or at all concerned. Both responses reflect more optimism about capital than that among CEOs globally.
In addition to M&A, strategic alliances and joint ventures remain a potential avenue for growth, with 47% of US CEOs planning such partnerships in 2018 – up slightly from a year ago. Those possibilities may be aided by the appeal of the US market to companies from other countries.
Often picked in the CEO Survey as a top three growth market, the US has extended its lead over other nations, with 46% of non-US CEOs tapping the US as a crucial market. In fact, the number of foreign CEOs who rank the US as a top three market has doubled over the past five years, opening the door for more mergers and alliances.
The CEO Survey findings echo PwC’s 2018 deals outlook, in which M&A is expected to maintain its brisk pace from the previous year while seeing a return of higher deal values. Between recent deal trends and CEOs’ confidence, the potential for M&A to play a pivotal role in business growth this year is clear.