Citi's latest report on how the corporate finance world plans to navigate volatility in 2019 suggests chief financial officers (CFOs) have a role model toward which to look: the so-called "tech titans."
In its Corporate Finance Priorities report, published this month, Citi Global Perspectives & Solutions (GPS) dove into an array of macro- and microeconomic factors forcing changes in corporate finance practices, including ongoing trade disputes and economic uncertainty. Analysts at the financial institution (FI) said they expect mergers and acquisitions (M&A) activity to heat up, and corporate finance teams must be prepared — both to strategically deploy capital for acquisitions, and to anticipate being a takeover target themselves.
Citi analysts pointed to some unsurprising factors that have raised anxieties among corporate finance executives for the year ahead.
"Fears of slowing economic growth, tighter monetary policy and trade-related tensions all contributed to heightened equity and credit market volatility during 2018," reflected Ajay Khorana, managing director and global head of Citi Financial Strategy and Solutions Group, in a statement announcing the report. "In this uncertain environment, companies will need to reassess their capital deployment programs and growth initiatives."
Analysts predicted continued, but slower, earnings-per-share (EPS) growth for corporate America this year, but Citi has urged corporate finance executives to take a careful look at how they are driving that growth, with M&A activity a significant contributor to EPS increases. Yet, Citi warned, "failure to appropriately execute on transformational M&A led to substantial underperformance."
The report stated that Citi estimates $10.6 trillion is currently available for corporate acquisitions and capital distributions, with half of that held by the world's top-100 corporations. Organizations that deploy capital via M&A investments must be able to adequately manage the complexity of deals, especially the largest ones, with Citi pointing to last year's "mixed response" to large acquisitions of more than $5 billion linked to an increase in failed deals.
"For [$10 billion-plus] transactions, the volume of cancelled deals was almost as large as that of completed deals in 2018," the report pointed out.
A spike in divestitures this year, resulting from strong 2018 M&A activity, is also likely to continue to force adjustments and reallocations of corporate resources. Furthermore, activist investors are urging large companies to consider buyouts to boost shareholder value, adding another item to CFOs' lists of focuses for the year.
Amid this M&A environment, however, financial executives are likely to see adverse impacts from the ongoing trade disputes related to trade tariffs, long-term impacts on supply chains and price volatility. With companies increasingly forced to adjust their supply chains to mitigate against these risks brought on by trade disputes, Citi's report also pointed to the importance of evaluating risks — particularly currency risks — associated with investments in emerging markets.
"Mounting trade-related tensions will remain a key risk in 2019," the report stated. "Earnings estimates have already been significantly lowered for both U.S. companies with exposure to China and Chinese firms with exposure to the U.S. These trade tensions should prompt a reevaluation of global supply chains and production locations."
News coverage of Apple's iPhone sales miss may be dominating current headlines, but Citi's report noted that corporate finance executives must "think like the tech titans" to focus on growth and stability ahead.
"The tech titans are among the largest firms today, and are disrupting a multitude of industries by crossing sector boundaries in ways rarely seen before," the report noted, adding that technology conglomerates are often front runners of innovation adoption, including artificial intelligence (AI), Big Data and the cloud. Representing 8 percent of global equity market capitalization, these technology giants have disrupted the traditional business model for multinational conglomerates, and have increased their investments in research and development, M&A and capital expenditure significantly more than so-called "legacy conglomerates."
Managing these disruptions means thinking like the disruptors, Citi noted, urging businesses and their finance executives to promote adoption of innovative technologies, and follow-the-leader on growth strategy.