Consolidation on hands? Growth strategy of CFOs indicates a recovery in the market

May 8, 2013

The economic sentiment among financial managers worldwide is modest but continues the upward trend of the previous quarter. About one third of the financial directors in the U.S. and Europe are more optimistic about the economy. However, CFOs have much greater confidence in their own company. In Europe, two thirds of them expect a growth in turnover and profit. Acquisitions are part of the growth strategy. These are the findings of the latest global survey of CFOs carried out by TIAS School for Business and Societyl and Duke University.

The optimism among CFOs has increased slightly during the first quarter of 2013. Approximately one-third of the European and American respondents indicated to be more optimistic about their own economy. Measured on a hundred point scale, the optimism level stands at 53 and 55 respectively. Big exceptions are Latin America and China, where more than half of the CFOs are more optimistic about the economic outlook. In both regions the optimism level reached as much as 69 (on a scale of 100). CFOs on all continents share the same macro-concerns, including weak consumer demand, price pressures and global economic instability. Big setback for European employment, but other indicators suggest that recovery may well be on its way

Road ahead for full recovery

The crisis seems to have bottomed out but even though we may have seen the worst we still have quite a road ahead for full recovery. From its onset in 2007, the economic downturn has forced many companies to take drastic measures in order to survive under prevailing market conditions. As a result, layoffs in Europe are expected to continue to this day. No less than 45% of European companies foresee to reduce full-time employment by an average of 3.7%. More than a third anticipates reducing the number of temporary workers at an average of 7.4%.

Despite the huge setback for employment, 37% of European financial directors indicate to be more optimistic about the prospects of their own company compared to last quarter. The average optimism level even stands at 60 (measured on a scale of 100). While business spending is expected to increase for technology (4.2%) and R&D (2.7%), three out of four CFOs also anticipate an increase in productivity per hour. Moreover, the average manufacturing capacity utilization for the second half of this year is estimated to reach 81%, about 5% higher than a year ago. On the back of these positive developments, 60% of the European CFOs expect to realize growth in both revenue and profit for 2013.

Companies are looking for growth opportunities and acquisitions seem to be the ideal strategy

We seem to have reached a tipping point in which companies are eager to deploy their accumulated cash reserves to increase market share. But due to lack of sufficient consumer confidence, macro-economic conditions are not optimal and pursuing organic growth therefore is somewhat difficult to achieve. The climate is however favorable for mergers and acquisitions, and many companies are well positioned to take advantage of this. It is no surprise that for 2013 alone some 30% of the European CFOs expect to complete such a transaction.

"Within the current economic environment it is not uncommon that takeover targets are priced at a discount against very favorable valuations. Moreover, the recovery that the equity markets are currently demonstrating will also contribute to positive developments in the relative value of these very same companies over time, making these targets even more attractive. Next to that, the historically low interest rates contribute to the availability of relatively cheap credit. This, in combination with the substantial cash reserves that companies have piled up in recent years, offers an abundance of financing possibilities. Against this backdrop we can expect to see an increase in merger and acquisition activity in the foreseeable future." said Kees Koedijk, dean and director of TIAS.

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Quaterly Report Q1 2013, CFO Survey (2013)

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