Study Shows Corporate Leaders Optimistic About Growth

Shannon Green

Corporate Counsel

2012-10-09 00:00:00.0

Despite the ongoing effects of the recent global financial crisis, most corporate leaders are optimistic enough about their business’ growth, according to a recent report, “Evolution: Profiting From Uncertainty” [PDF], by Hogan Lovells. Although the marketplace has seen low levels of mergers and acquisitions activity in the last few years, 59 percent of senior leaders predicted entering new geographic markets in the next two years, and 56 percent anticipated domestic acquisitions.

The findings are based on interviews with 160 board members and M&A heads at major companies from four regions—40 each from the United States, the United Kingdom, Continental Europe, and Asia. Consensus Research Group Inc. [link: http://consensusresearch.com/] conducted the survey on behalf of the firm and the Financial Times.

It was the second iteration of the business growth survey; the first was conducted a year ago. Stuart Stein, global co-head of Hogan Lovells’s corporate practice group, says that this year respondents demonstrated a much brighter outlook for the future.

Stein acknowledges that the optimism may seem somewhat counterintuitive, given the still-prevalent economic uncertainty and risks to corporate transactions. The report cites a Mergermarket statistic indicating M&A activity is only about a third as high as it was before the financial crisis.

Despite the available data, unknown variables are impediments for both sides when negotiating and closing deals, says Stein. Uncertain political, economic, and regulatory landscapes will likely continue to have an impact on deal activity in the foreseeable future. Eight-nine percent of respondents identified economic uncertainty as a key barrier to investment, and 62 percent said political uncertainty was a barrier. Topping the list of regulatory and legal concerns for senior leaders were financial regulation (44 percent) and labor laws (44 percent).

Stein says that companies have to factor the risks and uncertainties associated with their respective markets into their deal expectations. “The world goes on,” he says, “even with economic ups and downs.”

He points out that overall economic activity has been relatively stable, if not increasing, in a number of countries over the last year. “If you look at corporate balance sheets, you certainly see companies whose earnings have been stable, whose performance has been very good, and who have built up a lot of cash,” he says, “and they are looking for opportunity.”

Nearly nine out of 10 senior leaders predicted organic growth in their existing markets in the next two years, and 60 percent said they saw opportunities to acquire new businesses at relatively low prices. According to the report, companies’ perception that acquisition prices are now more reasonable than they have been might account for the increased optimism for the future despite current decreased deal activity.

Respondents’ primary concerns varied depending on the region in which they operate. But senior leaders across the board demonstrated plans to take precautions as they grow their business.

Only about a third of respondents said they were considering moving into new business sectors in the near future. To mitigate their exposure to risk as they grow, Stein says companies are focusing on areas critical to their operations and areas with which they’re already familiar. Stein says companies can adjust pricing, for example, of a resource supply deal or build contingencies into a contract if they are aware of the associated risks.

“They’re doing what they know,” he says, “and they’re going where they believe that there’s both demand and opportunity for the business that they know.”