Takeways: No deal and still we wait on Greece’s fate. Markets seem nonplussed. Is this faith in an 11th hour agreement or in sufficient mitigating factors? Both seem risky assumptions and no deal can ‘cure’ Greece overnight. Meanwhile, a tremendous amount of uncertainty remains elsewhere, not least in the volatile oil price and currency markets. The divergence theme we introduced last year is becoming a serious pain in the profits for US companies, as jobs figures shine. With sterling at a seven-year high against the Euro, currency remains high on UK corporate agenda’s too. Companies are recognising the need to adapt to this changeable world by looking at elements that they can control – like working capital – and using M&A to meet new strategic challenges.
And it all breaks down… (Again)
It was a long wait last night for the well overdue press conference, with little for journalists to go on beyond sartorial clues: Was Christine Lagarde’s leather jacket a sign of Greek solidarity? And then…well…we had what must count as one of the shortest, most ominous pressers in Eurozone history. No deal. No statement. They couldn’t even agree on a joint statement to say why there was no statement. (Although there is a ghost statement, apparently vetoed). It means that Eurozone mandarins won’t be working on a plan for next Monday’s meeting. The chance of the bailout running out in March and Greece having to impose capital controls now looks high; the chance of GREXIT is now c.40% according to the Economist Intelligence Unit.
Given this turn of events, the lack of market reaction is somewhat curious. There is still next Monday’s meeting and another two weeks before the current deal runs out. Perhaps investors are just really hardened to 11th hour agreements. There is also plenty of analysis showing that Greek debt is mostly owned by official sources, the Eurozone is obviously in a much more economically secure position than 2011-2, OMT/QE can absorb peripheral stresses and therefore most of the pain of GREXIT will be felt by Greece. This offers potential comfort and belief that Greece will be forced to deal.
May-be…. but we ignore the contagion lessons of the last seven years at our peril, whilst confidence in a deal overlooks what we might file under ‘Pride and Prejudice’. The need to mend pride hurt by previous 11th hour concessions. The need to restore pride after years of imposed policy. The prejudice that means the blame game still plays out across the region. Both passions promote misunderstandings, which can prove deeply unhelpful in a consensual restructuring. Protests last night – not just in Greece, but across Europe – also show how much is at stake here. Ignore the Greek government’s mandate or embolden anti-austerity movements? It’s hard to please everyone.
No-one wants GREXIT and consensus should be possible; but positions now look so entrenched it’s hard to see where that consensus will come from. In the meantime the consequences of intransigence, threat and counter threat aren’t having too detrimental effect – but that could quickly change.
Greece isn’t the only rollercoaster in town. As well as ‘cheap’ we can also add the moniker ‘volatile’ to oil. The CBOE Crude Oil Volatility Index is now at its highest level for four years.
The recent rally in oil prices – up by almost 25% on January lows – had encouraged talk of a ‘floor’. Although, given the somewhat loose relationship between oil and the standard rules of supply and demand, this call looked rather precipitous. Capital expenditure and rig counts have fallen dramatically, but as the IEA warned, it takes time for investment cuts to make a dent and the least productive rigs are often the first to close. Indeed, prices dipped this week as US inventory hit an 80 year high.
There are more twists in this tail, but $60/barrel appears to be the consensus for 2015 – still a painful price for many. Our UK Oil & Gas profit warning count for 2015 already stands at seven, against 11 for the whole of 2014, this being a joint-record high. Yet more companies have been caught in the crossfire, in some expected and unexpected places – from food to software.
Companies have recognised the need to start thinking differently about how they do business. Russian supplier Rosneft has a number of reasons for ingenuity, but its pre-financing deal with Trafigura could become a model for other oil companies. Meanwhile, the end of the commodity supercycle is also encouraging mining companies to think about what they can control. Cash, cost, capital discipline and project delivery are essential components in improving productivity levels. Our study of the 80 largest global miners by sales ‘Cash in the ground’, shows that working capital contributes between 7-14% of sales in the mining sector and is therefore a key component of value. However, companies are missing out on this easy money. In a time of declining margins, a lower draw on working capital can be the competitive difference between success and failure.
Using M&A to get on the right side of economic and technological change will be another element of success in this uncertain, lower growth world. Radical monetary policy, rebalancing, conflict and deflation are just some of the elements reshaping the economic landscape. Meanwhile, technology and disruptive new entrants are drastically reshaping industries. As Jon Hughes, EY’s UK & Ireland Transaction Advisory Services leader highlighted this week, the only certainty in this environment is that there will be winners and losers: those that adjust and thrive and those that fail to read the signs and fail to act.
Global growth will be lower, but not uniformly so, encouraging businesses to review their geographical mix. Previously fast growing emerging markets are slowing and previously decelerating developed markets – like the US – are picking up. Around 20% of UK deals in 2014 had a geographic driver. The imperative to consolidate, build diversity and cut costs is apparent many sectors, most obviously in Oil & Gas, but also for Aerospace, Industrial Products, Mining & Metals. Where disruptive technological influences are knocking the established companies off their perch, successful businesses are active acquiring new products and capabilities. Over a quarter of 2014 UK deals were in this category and we expect this to grow, led by sectors such as Media & Entertainment, Technology, Telecommunications, Consumer Products and Life Sciences.
Transaction levels have been too low for a recovering economy facing the disruptive changes.
New focus, new roles….
The need for clear strategic growth objectives is translating into a wider remit for corporate development officers (CDOs). Our latest corporate development study finds that CDOs are becoming more influential in corporate strategy, taking on new responsibilities and becoming better positioned to influence corporate success. Among our survey respondents, 44% report that the biggest change in the role of the CDO over the past five years is the greater alignment with the wider corporate strategic focus.
The study shows that new geographic markets and developing new products will be executives’ top transaction objectives for the next 12 months– linking in with our theme of being on the right side of the economic and technological line. The focus on growth strategy is also causing some companies to rethink their structures – putting strategy and corporate development into a single unit, with a chief growth officer (CGO) or a chief portfolio officer (CPO). Businesses are also approaching deals with increasing thoroughness and standardized processes. Tough completion for growth and deals requires a more rigorous, systematic approach.