2019: How was it for you?

This week’s Capital Agenda Blog comes from Lee Downham  – Partner and UK&I Markets Leader, Transaction Advisory Services and Kirsten Tompkins, UK&I Transaction Advisory Services Content Editor.

This week we look both back and forward as we reach the end of a year – and decade – of crisis, recovery, division, uncertainty and, above all, immense change. At times it felt as if we were stuck in the same exhausting news loop in 2019. But, this loop reflected the struggle to reconcile the impact of massive underlying changes in the political landscape, in our relationship with technology, in our respect for the environment and views on the purpose of corporations.

The start of the 2020s at least will be spent still trying to work through the fallout from these seismic changes, with businesses trying to anticipate and keep pace with the next big shift in their sector. It may be a more chaotic time, but this often creates opportunity.

Exhausting uncertainty

To get a handle on 2019, we’ve looked back at this year’s blogs. The most striking thing is how few of these are event-driven. We had drama, but little resolution. Instead, we spent most of the year in an exhausting Brexit and US-China uncertainty loop. All of which left us with little concrete to digest.

2019 word cloud

In the UK, the resulting chaotic stasis was most obvious in delayed decision making in investment, borrowing and contracts. Fewer decisions generally equals lower growth and UK GDP growth has stagnated into Q4 to it’s lowest level for a decade.

PW Contract Issues

The UK picture isn’t helped by what’s also probably been the worst year for global growth this decade. Global stock markets have begun to pick up in late 2019 on the back of improving data in some areas, notably in the US, and a decisive UK election result. There are clearly growing hopes that 2020 will bring geopolitical certainty and greater confidence. But opinion remains mixed.

CCB Downturn

The blurriness of the outlook is evident in the latest EY Global Capital Confidence Barometer survey (CCB21), which showed global executives roughly equally divided in their views -with UK respondents showing greater concern. The CCB21 survey pre-dates last week’s UK General Election and a majority government should provide greater policy direction in 2020; but UK policy, Brexit and wider global geopolitical certainty will elude us for some time yet. EY ITEM Club still expects UK GDP growth of just 1% in 2020.

Meanwhile, the our CB21 survey also shows that tariff and trade concerns are driving significant corporate changes in strategy and influencing M&A. Companies clearly feel the need to direct capital here; but will this divert investment from more potentially more productive areas?

Trade M&A

Rethinking the downturn

In 2019, sluggish growth inevitably brought more discussion of the age of this cycle and how to spot it’s demise. Do the old signs and portents still work? There is a strong argument to suggest that measures like inverted yield curves are less accurate in the current, still extraordinary, monetary environment. Moreover, there’s also a strong argument for thinking about this and future cycles in a more nuanced way, given the additional disruptive influences on sector cycles.

In less than ten years, smart phone ownership has risen from 25% to almost all UK adults under the age of 55, who check their phone on average every 12 minutes of the waking day and spend 24 hours a week online – double the figure of a decade ago. And, this fundamental change in consumer behaviour is just one of many seismic shifts that has contributed to an extraordinary, but uneven, recovery in the last decade.

Some sectors have sprung up, almost from nothing, fuelled by technological advance. Others, such as automotive and retail have seen growth overall, but alongside levels of corporate restructuring that we’d normally expect during a recession. UK disposable incomes have risen in 2019;, but a rising number of retailers are in crisis, many due to their failure or inability to keep up with a dizzying rate of change in technology and customer expectations – as we discussed last week.

We’d be reckless to call the end of ‘traditional’ recessions, but what we expect to see more of in the next decade are these kind of paradigm shifts that redesign industry landscapes, decouple sector and economic growth and leave the companies that can’t keep up in their wake.

Creating new purpose

Technology isn’t the only area where paradigms have shifted with remarkable speed in the last decade – and with great rapidity in 2019. The political uncertainty of the latter part of the decade reflects popular thinking on globalisation and redistribution and the shrinking of the middle.  It’s notable that all major political parties in the UK promised to reverse ‘austerity’ in their latest campaigns. We also only need look at the UK market for plastic straws to see how much climate change rose up the public agenda in 2019 – and how quickly business models can become outmoded.

This is also the year we started to hear more in the mainstream about the underlying long-term trends affecting value creation. as the pressure increases on companies to articulate their long-term value to both society and shareholders. The need for a strong corporate ‘purpose’ has become paramount, along with the related need to build trust.

This closer relationship between shareholder values and stakeholder interests – combined with disruptive forces (technological, economic, consumer and environmental) is reshaping  what we mean by value. And companies need to be able to articulate a strategy that encapsulates these values – something EY has been championing through the Embankment Project for Inclusive Capitalism (EPIC).

The EPIC project focuses on creating a four-part framework that helps companies think about their long-term value – three that go beyond traditional financial metrics.


Transforming transactions

Transformational strategy and M&A themes criss-cross everything we’ve spoken of so far. Companies simply must be constantly reviewing and adapting their strategy and capital allocation responses in response to this technology, political, trade, tariff, environmental and social change. Failure to act fast destroys value – as highlighted in our recent review of companies that issue multiple profit warnings.

To avoid a confusion of strategies, in the face of this maelstrom of conflicting forces, companies need to develop a clear transaction strategy and capital allocation that aligns with their strategy for long-term value creation. Companies also need to be assessing their portfolios regularly with more than a financial lens to assess what additional risks are coming over the horizon.

Similarly, in deals, diligence is becoming increasingly sophisticated to consider and validate non-financial drivers of value and to identify non-financial threats – such as the emergence of a new technology or competitor. Companies also need to consider the rising level of investor, political and social M&A scrutiny, which will affect how and what companies can buy and what they communicate during and after a transaction.


Thus, deals are becoming ever more complex, but necessary if companies want to transform at pace. The continued appetite for deals is clear. The UK is still the second most favoured nation for global executives looking for an acquisition. More than two third of UK executives expect to transact in the coming year. Most expect continued high levels of appetite – and competition – from private equity, which still has considerable dry powder to deploy. There is the potential for opportunistic deals – especially in stressed sectors.

But, there’s also an expectation that completions will be harder in 2020. In CCB21, 60% of UK respondents expect their deal pipeline to increase, but the percentage predicting more deal completions has fallen to 59%, from 89% just six months ago. Competition for deals in a more sluggish growth environment could put a strain on valuations. Capital markets, whilst still open, are more watchful and cautious in under pressure sectors. There is a significant backlog of IPOs that may be released in 2020 – but it all depends on what comes next….

… because the only constant we can really be sure of in 2020 is change. To that extent we can repeat the mantra of the last few years, for companies to remain flexible, agile, watchful of multiple horizons and ready to seize opportunity.