Early-mover advantage in strategic investments may hold the key to post-crisis recovery

Aurel Constantin 24/08/2020 | 12:07

The global transactions landscape has come to an abrupt standstill due to the COVID-19 pandemic, as companies preserve cash and grapple with the immediate impact of the crisis. EY research, however, reveals that companies that make bold decisions on their transaction and strategic investment plans early on after a crisis are the ones that benefit the most in the long-term.    

Reviewing transactions in the immediate period (2008-2010) after the Global Financial Crisis (GFC), EY research found that companies that were early movers and made bold choices on portfolio-transforming transactions saw a 25 percent increase in total shareholder return (TSR) over the following decade, compared to those that didn’t.

Businesses that made acquisitions saw 26 percent higher returns for shareholders. Those companies that proactively reshaped their portfolios by taking the harder, but more decisive, step to divest assets also reaped rewards achieving 24 percent higher returns over the same period.

In further evidence that companies that invested their capital following the GFC gained in competitive advantage, the research found that they saw two- or three-times higher returns over those that took a cautious approach.

“In any storm the natural reaction is to batten down the hatches and wait it out. But evidence suggests sitting tight and doing nothing in the eye of this downturn is not an option. As lessons from the post-financial crisis period show, the transactions’ landscape often enables companies to make high-quality acquisitions that can fuel faster growth in a recovering market. At the same time, organic growth through strategic investment is equally crucial. The tech industry, for example, reaped the benefits of increased R&D in that early recovery period post the GFC. Many of those investments fueled later moves by technology companies into sectors such as retail and entertainment,” says Andrea Guerzoni, EY Global Vice Chair – Strategy and Transactions.

Industry drivers behind pick up in M&A

With M&A activity across all sectors affected by the COVID-19 pandemic, the drivers that are likely to lead to a shift up in gear for deals vary considerably by industry, according to EY analysis.

In the healthcare sector, M&A activity is likely to be boosted by large companies buying innovative players in the cell and gene therapy space, as scientific advances continue to showcase the promise of these personalized therapies. A surge in joint ventures and alliances is also on the cards for the sector, as companies look to build the large-scale manufacturing and supply chain expertise required to scale-up delivery.

The media and telecoms sectors look set to overcome challenges caused by the shutdown and capitalize on the continued shift in consumer preferences for digital entertainment media. Whereas, in the technology sector, established players who are looking to augment their capabilities, especially in cloud and customer engagement, will expand their market share and increase their top line by capitalizing on the attractive pricing of innovative start-ups.

In retail and industrials, combinations aimed at shoring up balance sheets and companies’ ability to generate higher levels of cash flow and boost cash reserves will help spur up activity. At the same time, transactions in the automotive sector will be driven by existing market trends, such as the shift to fully electric vehicles.

The research comes from EY Strategy and Transactions, a redefined EY service line that will house expanded strategy consulting practices, bringing together capabilities from EY-Parthenon (strategy consulting) teams and the advisory and transactions businesses. In Romania the department has a team of 42 professionals, led by Florin Vasilica, Head of Strategy and Transactions department.

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