Following years of sluggish economic recovery, business leaders believe 2017 stands to usher in a long-awaited acceleration in growth. According to ‘America's economic engine - Breaking the cycle’, Deloitte's 2017 report on business and economic trends in the privately-held and middle-market segment, 83% of executives surveyed after the November election are confident that the US economy will improve over the next two years (compared to 65% last year). In fact, 39% of respondents expect the US economy to grow in excess of 3.5% over the next 12 months.
The executives surveyed are equally optimistic about their company's success and performance in the year ahead, particularly across key business metrics such as employment, productivity, profits and capital investment. 78% of respondents expect revenue growth in excess of 5%.
"Our postelection survey paints a positive picture for breakout growth in 2017, pointing to a strengthening economy and potential improvement in business conditions year-over-year," says Roger Nanney, vice chairman, Deloitte LLP, and national managing partner of Deloitte Growth Enterprise Services.
In addition, the survey revealed that two-thirds of respondents believe the US election results will boost the US economy; another 63% believe the new administration will have a positive impact on their company's operations.
Optimism tempered by heavy dose of uncertainty
While postelection promises have buoyed confidence in the economy and in company growth among private company and middle market executives, the results also show increased uncertainty: 70% feel more uncertain than they did a year ago about the main factors driving their future business prospects.
"Certain economic and geopolitical issues are among the obstacles these executives cite in the survey," says Bob Rosone, managing director, Deloitte Growth Enterprise Services, Deloitte LLP. "However, the respondents appear hopeful that these challenges might be addressed with policy changes by the new administration."
According to the survey, business leaders see increased regulatory compliance (33%), keeping up with the pace of technology (33%), and rising health care costs (32%) as the top three obstacles to their company's growth. Executives also emphasized skills shortages as a growing concern, increasing by 10 percentage points from last year as a roadblock to economic and business growth.
When asked which government measures would help their businesses grow the most over the next 12 months, the No. 1 response cited was reducing corporate tax rates; keeping interest rates low, rolling back health care costs, and supporting infrastructure needs were all tied for the next most important measure.
Technology and talent continue to drive mid-market investments
Technology yet again tops the list as the key investment priority for surveyed companies over the next 12 months. Business leaders are particularly looking to focus their technology investments on cloud computing (42%), data analytics (40%), and customer relationship management (34%). They indicated the greatest potential returns from technology investments like these may be business process improvement, employee productivity and customer engagement.
Employee development and training also continue to be a key investment, as 72% of survey respondents indicated they have difficulty finding new employees with the right skills and education. For this reason, training (47%), increasing full-time employees (44%), and increasing compensation (33%) were cited as the top investments in talent over the next 12 months.
Mid-market companies tap M&A and IPO to remain in growth mode
According to the survey, private and mid-market companies are also looking to mergers and acquisitions (M&A) and initial public offerings (IPOs) to reach their business goals. While global M&A and IPO activity slowed sharply in 2016, more companies from the survey expect to pursue deals and go public in 2017.
More than half (53%) of the companies surveyed say they will likely pursue M&A as an acquirer, up from 39% a year ago. Furthermore, 45% of companies say they will likely be an M&A target, up from just 21% last year. Two of the main factors that respondents believe will drive M&A activity in their company over the next 12 months are increased availability of capital and renewed confidence in the economy.
As for pursuing an IPO, 28% of companies reported that they would likely go public in the next 12 months, nearly doubling the number of companies from last year (15%). Reasons cited include broadening the exposure of the company's brand and products, the cost-effectiveness of equity capital, and the need for additional capital to fuel growth.
Companies look to global markets to help address challenges
The survey reiterated the importance of the global economy as US mid-market companies are increasingly looking overseas to expand their operations, boost their productivity, and develop new products and services.
More than half of the companies surveyed expect to increase their revenues generated outside of the US, with 29% predicting revenue increases between 26 and 40% over the next 12 months. Canada, Western Europe, and Asia Pacific are expected to be the top three contributing markets. Additionally, nearly 60% of mid-market companies expect to have 11% or more of their workforce outside the US, compared to 42% currently. This will be an important trend to follow as the skills gap consistently emerges as a growing concern.
"As mid-market companies plan for overseas expansion and closing the skills gap, new policies and regulations around trade could have a significant impact on economic activities abroad," concluded Nanney. "The good news is that companies in this segment are confident and looking for opportunities to improve their businesses in an ever-changing landscape.”
(Source: Deloitte)
Deloitte predicts that over 300 million smartphones, or more than one-fifth of units sold in 2017, will have machine learning capabilities within the device in the next 12 months. The 16th edition of the "Technology, Media & Telecommunications (TMT) Predictions" showcases how mobile devices will be able to perform machine learning tasks even without connectivity, which will significantly alter how humans interact with technology across every industry, market and society.
However, over time machine learning on-the-go will not just be limited to smartphones. These capabilities are likely to be found in tens of millions (or more) of drones, tablets, cars, virtual or augmented reality devices, medical tools, Internet of Things (IoT) devices and unforeseen new technologies.
"Machine learning is fascinating as it will revolutionize how we conduct simple tasks like translating content, but it also has major security and health consequences that can improve societies around the world," said Paul Sallomi, vice chairman and global TMT industry leader, Deloitte LLP and US technology sector leader. "For example, mobile machine learning is a strong entry point to improve responses to disaster relief, help save lives with autonomous vehicles, and even turn the tide against the growing wave of cyberattacks."
"Our predictions for 2017 showcase the enormous influence that machine learning and the Internet of Things are having on the current technology marketplace," said Sandy Shirai, principal, Deloitte Consulting LLP and US technology, media and telecommunications leader. "With many technologies coming into their own as their power and speed increases and the cost of delivering them goes down, we'll continue to see these platforms grow exponentially and expand their role across industries, creating a whole new value proposition and opportunities."
Another innovation with the power to transform the world is autonomous braking. Deloitte predicts that in 2022, in the US alone, fatalities from motor vehicle accidents will have fallen by 6,000, a 16% decline in 2017. The greatest factor in this decline will likely be automatic emergency braking (AEB) technologies. Deloitte expects that AEB will be so widely adopted, affordable, and successful at helping to save lives that it may even slow down the movement toward full self-driving cars.
It's not just about developing new technology, but how this technology is procured that is set to transform how we live and work. Deloitte predicts that by the end of 2018, spending on IT-as-a-Service for data centers, software, and services will reach nearly $550 billion worldwide, up from $361 billion in 2016. Although flexible consumption-based business models will not be ubiquitous by 2018, at over a third of all IT spending (35%), they're expected to exceed half a trillion dollars and grow rapidly. This shift will begin to transform how the IT industry markets, sells and buys technology across businesses worldwide.
(Source: Deloitte)
UK companies are attracting strong interest from overseas buyers with M&A deal values reaching $39.7 billion (€37 billion) for the first quarter, the highest figure since 2008, according to analysis from Deloitte. This is up 63% on the fourth quarter of 2014, when inbound deal values stood at $24.4 billion (€22.7 billion). The rise is driven by a surge in acquisitions from North American and Asian companies.
Iain Macmillan, Head of M&A at Deloitte, commented: “Foreign buyers continue to find UK assets attractive and are confident about the economic recovery. This is underlined by recent deals in the telecommunications and manufacturing sectors, amongst others. In addition, the US dollar has risen by 14% against sterling since last July, substantially boosting US corporate spending power here.”
However, in the first quarter of 2015 outbound UK deal values more than halved compared to the fourth quarter of 2014, while domestic deal making values were also down.
Macmillan added: “This confidence from abroad contrasts with attitudes at home, where UK businesses seem willing to sell but not necessarily to acquire. Outbound UK deal values are down, while domestic deal making values were also subdued. It seems the uncertainties surrounding UK elections may have had a temporary impact on the pick-up in deal momentum.”
Financing conditions remain overwhelmingly positive for large corporates. Deloitte’s CFO survey reports that the cost of credit has hit a seven-year low, while availability of credit remains close to a seven-year high in the first quarter of 2015. In addition, 61% of the UK’s CFOs believe now is a good time to issue equity.
Chris Nicholls, Head of equity capital markets at Deloitte added: “Both equity and debt markets remain highly supportive of M&A transactions, large and small. Rising equity markets have seen record amounts of acquisition-linked financing and market appetite for underwriting major transactions. This combination means corporates looking to fund M&A in many sectors ‘have never had it so good’."
Inbound acquisitions into Europe are growing at the fastest pace in a decade, and six out of the top ten deals announced in 2015 were from non-European acquirers. Globally, $644.9 billion (€600 billion) worth of deals have been announced in first quarter of 2015, surpassing the US $563.4 billion (€525 billion) announced in first quarter of last year.
Chinese investors are doing a far higher value and volume of M&A deals in Europe than European investors in China, according to data from Deloitte. In 2014 Chinese companies and financial investors announced 79 deals in Europe, compared to 54 European deals in China.
In terms of value, in 2014 the average disclosed deal size for Chinese investors in Europe was £249 million (€332 million). This compared with £116 million (€155 million) for European investors in China. At the top end the difference is even more pronounced, with the five largest deals done by Chinese investors in Europe having total value of £6.6 billion (€8.8 billion), whereas the five largest deals done by European investors in China had total value of only £1.4 billion (€1.86 billion).
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Graham Matthews, lead China M&A Partner for Deloitte, commented: “In the space of a few years the tectonic plates between Europe and China have shifted, with Chinese deal activity surging in 2014. No European company or private equity fund has ever done a deal larger than £1 billion (€1.13 billion) in China, but last year alone there were five Chinese acquisitions in Europe of around this size.
“The shift in the balance has profound consequences for deal makers. Any seller of assets in Europe should be actively thinking about how to attract and include Chinese buyers in their sales processes.”
Business should focus on people and purpose, not just products and profits according to Deloitte Touche Tohmatsu Limited's (Deloitte Global) fourth annual Millennial survey. This and other findings from the survey suggest businesses, particularly in developed markets, will need to make significant changes to attract and retain the future workforce.
Deloitte Global surveyed 7,800 graduates born after 1982 in full-time employment across 29 countries, including the UK, on effective leadership, how business operates and impacts society.
Some 71% of UK respondents say businesses have a positive impact on society, compared to 82% in emerging markets and 73% globally. However, 77% of UK Millennials, and 75% globally, believe businesses are focused on their own agenda rather than helping to improve society. Just 48% of UK Millennials say businesses show strong leadership on important social issues, compared to 61% globally. Similarly, just 39% of UK Millennials say businesses act in an ethical manner, against 52% globally.
When asked which sectors they aspire to work in, 40% of UK Millennials say the professional services sector is attractive, with 34% expressing a preference for the technology, media and telecommunications (TMT) sector. This trend is reversed globally, with 46% of Millennials worldwide keen to work in the TMT sector, ahead of professional services at 39%. UK male respondents are more likely to choose the TMT sector, with 40% preferring the sector, ahead of 27% of women.
Steve Almond, Chairman of Deloitte Global, said: “The survey sends a clear and strong message to business leaders that, to stay engaged with Millennials, they need to focus on their broader purpose and their people as much as they do on products and profits.”
Barry Salzberg, CEO of Deloitte Global, added: “Millennials want more from business than might have been the case 50, 20, or even 10 years ago. They are sending a very strong signal to the world's leaders that when doing business, they should do so with purpose. The pursuit of this different and better way of operating in the 21st century begins by redefining leadership.”
2014 proved a record year in terms of mergers and acquisitions (M&A) activity, according to data from Deloitte.
The firm stated that high M&A deal values made an emphatic return in 2014, particularly in the healthcare, TMT and consumer products sectors. In the first three quarters of 2014, companies spent US$2.5 trillion (€2.1 trillion) on M&A activities, making 2014 the best year for deals since 2007.
“The high value of deals will remain in 2015, with a cautious but steady pick-up. In 2015 I would expect to see these sectors continue to perform well, but in addition to more activity in the mining and resources sector, with speciality finance also being one to watch. By geography, the faster pace of recovery in the US over Europe will also deliver more trans-Atlantic interest in the industrial and manufacturing services,” said Paul Lupton, Head of Advisory Corporate Finance for Deloitte.
Consumer product M&A activity also saw increased activity levels in 2014. According to Deloitte, Emperado’s acquisition of Whyte & Mackay and, more recently, Yildiz’s acquisition of United Biscuits signalled the welcome return of overseas buyers making major investments in the European market. Benign credit conditions, large corporate war-chests and increased US buyer interest in Europe also point to an increase in activity levels.
Conor Cahill, Corporate Finance Partner at Deloitte, said that a number of major corporates are now re-aligning their brand portfolios and divesting non-core assets, with Reckitt Benckiser’s divestment of Ribena/Lucozade and Unilever’s disposal of its Ragu and Bertolli businesses as examples of this.
“Looking ahead, despite the easing of general commodity prices, consumer product companies continue to face pricing pressure as the intense competition between discounters and larger retailers persists. The ability to demonstrate innovation and investment will remain critical for branded goods producers to differentiate themselves from their private label counterparts,” said Mr. Cahill.
Policy uncertainty at home and economic and geopolitical risks overseas are the central challenges facing Chief Financial Officers (CFOs) of the UK’s largest companies as they enter 2015. This is according to Deloitte’s latest CFO Survey, which gauged the views of 119 CFOs of FTSE 350 and other large private UK companies.
When asked to rate the level of risk posed between 0 and 100, CFOs attached a 63 rating to the General Election and 56 to deflation and weakness in the Euro area and to a possible referendum on the UK’s membership of the EU. The level of risk posed by each factor has risen in the last three months.
Ian Stewart, Chief Economist at Deloitte, said: “Concerns about policy change after May’s General Election have risen significantly and this is seen as the biggest risk facing UK business in 2015. Deflation and weakness in the euro area is a growing concern and is now the second greatest business risk, followed by a UK referendum on EU membership and by emerging market weakness. Again, CFOs believe that the level of threat posed by each has risen over the last three months.
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“This marks a big shift in thinking. Going into each year, from 2008 to 2013, CFOs’ main concern was the state of the UK economy. Now the risks are seen as lying elsewhere.
Further UK-specific concerns – poor productivity, the possibility of a housing bubble and further cuts in spending - ranked as the lowest risks, each scoring 39.
On average, CFOs expect earnings in their businesses to rise by 2.9% in 2015, far faster than CPI inflation, which economists expect to increase by 1.3%.
The proportion of CFOs for whom increasing capital expenditure is a strong priority rose to a two-year high in Q4. On average CFOs expect their investment in the UK to rise by 9% in 2015, following growth of about 8% in 2014. A 9% rise would put the UK ahead of the major industrialised nations for investment growth in 2015 and see the proportion of UK GDP accounted for by business investment reach the highest level in 15 years.
“CFOs expect 2015 to be a year of investment and of recovering real earnings in the UK. Corporate and consumer spending look set to lend the UK economy important support, suggesting the UK will post decent growth through 2015,” Mr. Stewart remarked.
