Boards listening to shareholder activism
Shareholder activism has elevated a number of items on the boardroom agenda, particularly cost reduction. Only 13 per cent of respondents said shareholder activists had minimal impact, demonstrating their growing ability to put the board under pressure. Shareholder activists typically focus on organisations with high expense ratios, multiple, disparate and sometimes non-core operating units, and a history of mixed returns from their capital allocation. As activists become increasingly influential, the board response has been to focus on: operational efficiency; spinning off non-core units; and returning capital to owners via buybacks and dividends.
Clear focus on steady growth
More than half of respondents (56 per cent) are planning to generate more than 25 per cent of their anticipated growth through acquisition in the current fiscal year. In line with this, 54 per cent say "growth" best describes their organisation's current focus. Although this figure appears to compare unfavourably with the 70 per cent who reported growth as their focus six months ago, this overwhelmingly positive response was likely buoyed for Australian respondents by the completion of the Australian Federal election and in anticipation of greater political certainty thereafter. At the time, we noted this positive sentiment would likely moderate. As expected, companies now have a more realistic view of market possibilities and regulatory constraints. However, we expect the corporate focus on growth to climb - slowly but steadily - over the next 12 months.
For the past 18 months, just more than a quarter of companies have consistently reported cost reduction and operational efficiency as their main focus. Just under one in five are focused on maintaining stability. Only a very few - just 2 per cent - are still focused on survival.
Higher-risk organic strategies
There is renewed interest in higher-risk organic growth strategies. Six months ago, lower-risk strategies dominated, with companies largely concentrating on growing core services in existing markets. There has now been a dramatic shift, as companies look to increase R&D and exploit technology to introduce new products and services. They are also keen to move into new markets and geographies.
More deals being put to boards
Nearly 65 per cent say they are putting more deals on the boardroom table. And these deals are getting larger: 26 per cent were looking to engage in larger acquisitions (>US$500M), up from 8 per cent a year ago.
Overpaying for an acquisition is the most common reason for it failing to meet expectations, with 26 per cent citing this issue. Executives estimate that 36 per cent of unsatisfactory deals came down to unforeseen liabilities and poor operating cost assumptions that weren't picked up during due diligence. Other reasons included: poor integration; margin deterioration when new owners failed to optimise costs; and lost sales or customers from a decline in service or product quality.
Deal metrics improving
In the past 12 months, respondents' confidence in the number of acquisition opportunities has jumped from 31 per cent to 57 per cent their confidence in the quality of acquisition opportunities from 27 per cent to 37 per cent; and their confidence in the likelihood of closing deals by from 20 per cent to 31 per cent..
Companies anticipate increased deal pipelines
Three in 10 respondents anticipate their deal pipelines will increase in the next 12 months. Just 5 per cent expect them to fall. Of those with deals in the pipeline, 77 per cent are looking at 1-3 transactions at any given moment, with 9 per cent considering five or more.
Top investment destinations for Australasian companies
1. China
2. India
3. Malaysia
4. Singapore
5. Thailand
Top investment destinations for global companies
1. China
2. US
3. India
4. UK
5. Germany
(Australia 22; New Zealand 46)
• 77 per cent of executives feel confident about corporate earnings 56 per cent are planning to generate more than 25 per cent of their anticipated growth through acquisition 65 per cent say they are putting more deals on the boardroom table. 77 per cent are looking at 1-3 transactions at any given moment.
