CFO Survey Europe Report Q1 2013 - TIAS · 2017-05-23 · Receive a Big Blow in 2013 CFO Survey...

Q1 2013

M&A Activity Possibly a Driver of

Growth Amidst Mediocre Optimism

Employment in Europe Expected to

Receive a Big Blow in 2013

CFO Survey Europe - Quarterly Report

First Quarter 2013

2 | P a g e C F O S u r v e y E u r o p e R e p o r t T i a s N i m b a s B u s i n e s s S c h o o l

Introduction 3

CFO optimism & sentiment 4

Finance & capital 6

Employment 11

Key results CFO Survey – Europe, US and Asia 12

Contents

First Quarter 2013


Introduction

Economic sentiment has improved somewhat during the first

quarter of 2013. Around 30% of the European respondents indicate to

have a more optimistic outlook on the economy for the next twelve

months, compared to only 20% during the previous quarter.

European financial executives anticipate an average real economic

growth of 0.4%. However, in case the US may end up in another

recession, these same executives expect an economic contraction of -

1.3% on average. So far, chief financial officers in the US are fairly

sanguine about their economy. Around one third are more optimistic

now, compared to only 20% during Q4 2012.

In Latin America, economic sentiment has improved further for the

fourth consecutive quarter. Just over 52% of the CFOs are more

confident about the economic prospects for 2013. The same holds for

their Asian counterparts (40%), with Chinese in particular (50%), who

also indicate to have a more favorable outlook on their economy.

Even though the macro-economic sentiment among European CFOs

remains modest, there are signs at company level that indicate that

the crisis may have bottomed out. While spending is expected to

increase on technology (4.2%) and R&D (2.7%), three out of four

CFOs also anticipate an increase in productivity per hour. Moreover,

the average manufacturing capacity utilization for the second half of

2013 is estimated to reach 81%. 60% of the European CFOs expect to

realize growth in both revenue and profit this year.

It is not surprising that on the back of these positive developments,

almost 40% of European financial directors are more positive about the

financial prospects of their own company. We expect M&A activity to

pick up again as companies are looking for growth opportunities.

Figure 1. Optimism index for CFOs in Asia, Europe, US and China

-100%

-75%

-50%

-25%

0%

25%

50%

75%

100%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Asia Europe United States China

Source: own research

Optimism in Europe is characterized by slight improvements

Latin America and Chinese region are the big gainers

At company level the outlook for Europe is

a bit brighter

First Quarter 2013


CFO optimism & sentiment

In the first quarter of this year, the optimism among European

CFOs about the own economy witnessed a slight improvement and

continues to inch upward. The average optimism level during Q1 2013

remains modest at 53 (on a scale of 100) but shows an ongoing climb

compared to Q4’12 (52) and Q3’12 (49). This small but positive and

persistent uptake may indicate that we have seen the worst of this

crisis.

This is also evidenced by the distribution of optimists and pessimists.

In contrast with the previous three quarters during which the number

of optimists and pessimists remained quite steady at an average of

20% and almost 50% respectively, we now observe an improvement in

the number of optimists (31%) and pessimists (31%) during Q1 2013.

Figure 2. European CFO sentiment regarding economy of own country

31%

39%

31%

More optimistic

No change

Less optimistic

Almost one third of the European respondents believe that the

European currency is overvalued and should be depreciated by an

average of 13.2%. If the Euro is indeed overvalued, this would have a

negative impact on the competitiveness of the Eurozone and ultimately

damage the export and growth potential. This extra source of concern,

in combination with worries about consumer demand and price

pressure from competitors (table 1) may explain why macro-economic

sentiment currently remains at such a moderate levels.

Another 12% believes that the Euro is actually undervalued (and

should at least increase in value by an average of 10%).

Table 1. Macro and internal concerns of European CFOs

Macro concerns Internal concerns

Consumer demand Ability to maintain margins

Global financial instability Ability to forecast results

Price pressure from competitors Working capital management

National government policies Attracting and retaining qualified employees

Trend signals crisis has bottomed out

But worries of over-valued Euro put extra strain on optimism

First Quarter 2013


Figure 3. Optimism level about own country’s economy

0 10 20 30 40 50 60 70 80

Asia

China

Europe

US

Latin America

index

Last quarter This quarter

The economic outlook for the other regions (figure 3) offers a much

more promising picture:

The optimism level in the US exhibits a strong improvement from

50 (on a scale of 100) in Q4 2012 to 55 this quarter.

In Asia the level of optimism was slightly down from the previous

quarter but remains strong at 61.

China witnessed an increase to 69 (on a scale of 100), up from 67

during Q4 2012.

The optimism level in Latin America climbed to 69 (on a scale of

100), continuing the upward trend for the fourth consecutive

quarter. Figure 4. European CFO sentiment regarding financial prospects of own company

37%

35%

28%

More optimistic

No change

Less optimistic

CFO sentiment regarding the financial prospects of the own company

stands at 59.3 on a scale of 100. We observe that this level of

confidence has remained quite steady over time but that the actual

distribution between optimists and pessimists has improved over the

last three consecutive quarters.

During this first quarter, 37% of the European CFOs indicate to be

more optimistic about the prospects for their own company (figure 4),

a level that has not been seen since one year ago during Q1 2012. This

could be a first indicator signaling that we may have seen the worst of

this crisis.

Sentiment in Europe on the economy trails that of rest of world…

…but is more robust

at company level

..at a level that has not been witnessed since a year ago

First Quarter 2013


Finance & capital

On the back of the small uptake in sentiment of European financial

directors regarding their own company’s fortunes, we observe that

business spending on technology and R&D is expected to increase

during 2013 (figure 5).

Figure 5. CFOs' quarterly expected growth in spending for next 12 months

1,5%

4,2%

2,7%

-0,6%

Capital investments Technology Research &Development

Marketing &Advertising

Q1 2012 Q4 2012 Q1 2013

Capital spending and investments for the next twelve months are

expected to increase at an average rate of 1.5% compared to a

rate of 3.5% during the previous quarter

Spending on technology is expected to increase with 4.2% in 2013

which is substantially more than the expected growth of 0.3%

during the previous quarter.

European CFOs also anticipate increased spending on R&D at an

average rate of 2.7%, up from 0.8% in the previous quarter

Spending on marketing and advertising is expected to witness a

reversal, ending up in negative territory and resulting in anticipated

cuts of approximately 0.6%.

We see that the overall expectations with respect to major business

spending items are quite positive. Taking also a closer look at other

company fundamentals, we conclude that the economic crisis indeed

may have bottomed out. Almost 75% of the CFOs expect to see an

increase in productivity (measured by output per hour) over 2013.

Moreover, the manufacturing capacity utilization for the second half of

2013 is expected to reach almost 82%, up 5% compared to H2 2012.

On the back of these positive developments, almost 60% of the

European financial executives foresee growth in revenue, earnings and

cash reserves. This clearly signals improvement at company level.

We believe that the start of the economic downturn in 2007, has forced

companies to take drastic measures to be able to survive under the

harsh economic circumstances.

Business spending still in positive territory

With productivity expected to

increase…

…contributing further to bottom-line growth

First Quarter 2013


However, the protracted nature of the crisis has also caused companies

to gradually get used to the new economic realities. We also believe

that the market environment is slowly stabilizing (politically and

economically), thus creating a new equilibrium and carefully

contributing to confidence throughout the market.

So while at the beginning of the downturn, most companies have tried

buying time and waiting for the (worst of) the crisis to pass, they now

dare to look ahead again. But even though these developments at the

company level may offer new growth perspectives, CFOs are still

confronted with a weak economy. Low confidence levels of European

consumers (figure 6) currently act as a brake on economic growth and

need to improve significantly before companies can realize organic

growth.

Figure 6. European consumer confidence index

-35

-30

-25

-20

-15

-10

-5

0

5

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: European Commission and own research

Another factor that may be of importance to European companies

looking for growth opportunities is the speed with which growth can be

materialized. If companies are looking for quick access to new markets

or want to obtain technological knowledge or any other specific

expertise, organic growth strategies are a lengthy and expensive

approach. A suitable alternative would be to engage in a merger or

acquisition. Figure 7. How many mergers or acquisitions has your company completed in the last 3 years?

62%

17%

6%

5%

10%

None

One

Two

Three

More than three

As markets are

stabilizing…

…European companies may consider putting growth back on the agenda again

As consumer confidence is still weak…

Executives may consider a merger or acquisition

First Quarter 2013


Almost 40% of the European respondents claim to have completed one

or more acquisitions in the last three years (figure 7). The average

deal size of the respondents’ transactions was approximately 50 million

Euros. These were mostly transactions of up to 10 million euros.

Around one third of the transactions included deals larger than 100

million euros.

The primary objective of M&A activity has clearly been growth of

operations (in 60% of all cases), either through market expansion in

existing markets or geographical expansion (figure 8). Figure 8. What have been the primary objectives of the acquisitions that your company has completed?

34%

26%

14%

12%

11%3%Increasing our market share in existing market(s)

Geographical expansion

Vertical integration of our operations

Horizontal integration of our operations

Diversification into a new sector

Other

In 2013 alone, around 30% of the European companies expect to

complete an acquisition, half of which concerns an international

transaction. The vast majority of their cross-border M&A activity is

targeted at European assets (figure 9). Figure 9. Target regions for cross-border acquisitions by European companies

European assets seem to remain attractive targets, not only for

European companies but also for their American competitors. Almost

40% of the US respondents have plans for acquisitions in 2013. One

fourth of these deals would include cross-border transactions, of which

European assets are the most popular. So we clearly can expect an

increase in European M&A activity for the coming period. We identify a

couple of factors that explain this surge.

Asia & Pacific Basin

24%Africa

11%Latin America

17%

US & Canada

17%

Europe

31%

And as M&A activity has been frequent in

the last three years…

…we should expect to see even more activity in Europe during 2013

First Quarter 2013


1. Adequate financial funds

In the last couple of years companies have been piling up cash

reserves. Initially, these served as buffers for the economic crisis. Now

that companies are finally looking for opportunities to grow, these cash

reserves offer an attractive way to finance acquisitions. Especially for

public companies which seem to be well positioned for this. European

companies expect to realize a growth in earnings of around 7.5% in

the next twelve months and anticipate a growth in cash reserves of

almost 8%. American CFOs of publicly listed companies even expect to

witness a earnings-growth of almost 10% and a growth in cash

reserves of 7%.

Next to that, almost 70% of the European financial directors claim to

have quite easy access to adequate (external) funds to finance their

growth strategy. The historically low interest rates (ECB rate of 0.75%

and FED rate of 0.25%) ensure that companies have access to

relatively cheap credit.

2. Recovery of stock markets leading to favorable asset valuations

Stock markets have received a big blow since the onset of the

economic downturn. From 2009 onwards however, markets seem to

have rebounded and started to recover. But this turns out to be a very

long and slow process (figure 10).

Figure 10. Indexed development of stock markets in the US and Europe (2008 = base)

0

20

40

60

80

100

120

140

2008 2009 2010 2011 2012 2013

United States (S&P 500) Europe (S&P EUROPE 500)

Source: S&P Dow Jones and own research

From mid-2011, the market in the U.S. finally has risen above the level

of 2008, and with that slowly climbs towards pre-crisis levels. And

even though this level of recovery in the European market(s) lags that

of the US by about one year, the markets on this continent also have

climbed above the level of 2008 since Q2 2012.

The availability of financial funds…

…in the midst of recovering markets…

First Quarter 2013


This is a positive sign as a rise in stock markets generally contributes

to M&A activity. In reality the markets are still in a very premature

stage of recovery, the climate for acquisitions is therefore very

favorable. Companies capable and eager to engage in M&A activities

now, will find very attractive opportunities in the market.

Under economic conditions similar to those that we are experiencing

today, it is not uncommon that takeover targets are priced at a

discount and against very favorable valuations. Moreover, the recovery

that the equity markets are currently demonstrating will also

contribute to positive developments in the relative value of these very

same assets over time, making these targets even more attractive.

From the supply side we should also expect to see more assets being

offered in the market. These are not necessarily driven by weak

company performance but by companies and investors that are

actually looking for exit strategies for their investments and who want

to capitalize on rising stock market valuations.

…contribute to a favorable climate for

M&A activity

…evidenced by favorable asset

valuations

First Quarter 2013


Employment

Q1 2013 shows dramatic decline in expected growth for

employment. Contraction is anticipated for both full-time and

temporary contracts with outsourced employment likely making up a

small fraction of the fallback. Employment outlook has been weak for

the last three quarters already. However, this quarter’s bleak

employment expectations for the next twelve months have not been

seen since the height of the crisis in 2009. European CFOs expect to

reduce full-time employment with 3.7% on average while temporary

employment is likely to be hit hardest with a reduction of 7.4% on

average (figure 11).

Figure 11. European CFOs expected growth for next 12 months in employee mix

-3,7%

-7,4%

4,7%

Employment – full-time Employment – temporary Outsourced Employment

Q2 2012 Q3 2012 Q4 2012 Q1 2013

Layoffs in full-time employment will take place at approximately 45%

of the European companies while reductions in temporary employment

are likely at one third of the companies (figure 12).

Figure 12. Relative to the previous 12 months, do you expect a positive or a negative change for your company in the following items?

42%

74%

78%

34%

33%

21%

52%

17%

8%

58%

22%

45%

6%

10%

14%

8%

45%

34%

Health care costs

Productivity (output per hr)

Wages & Salaries

Outsourced employees

Domestic full-time employees

Domestic temporary employees

Positive No change Negative

As three out of four CFOs also expect to see increases in wages and

salaries as well as productivity gains (measured as output per hour),

the gloomy outlook for employment may actually indicate that

companies are attempting to improve efficiency in their operations by

means of redundancies. Companies would only consider hiring specific

skills and expertise that may actually prove to be scarcely available. In

this case structural unemployment is likely to increase further.

Bleak outlook for employment

Similar to the situation during the height of the crisis

Possibly of a more permanent nature

First Quarter 2013


Key results CFO Survey – Europe, US, Latin America and Asia

Key Indicator US Latin America Europe Asia

Optimism about the country’s economy

More opt: 31.4% Less opt: 35.4%

No chg: 33.2%

More opt: 52.5% Less opt: 18.3% No chg: 29.2%



Country optimism level 55.3 69.0 52.7 61.1

Optimism about own company




No chg: 34.7%


No chg: 16.8%

Own company optimism level 63.8 69.4 59.3 64.1

Capital spending 5.3% 7.4% 1.5% 5.1%

Technology spending 7.8% 8.5% 4.2% 8.7%

R&D spending 1.0% 4.1% 2.7% 5.4%

Advertising and marketing spending 4.3% 6.2% -0.6% 4.3%

Employment – full-time 2.2% 5.9% -3.7% 5.9%

Employment – temporary 0.4% 1.7% -7.4% -0.1%

Outsourced Employment 1.2% 2.5% 4.7% 5.0%

Wages and Salaries 3.1% 5.3% 1.2% 8.0%

Productivity 3.2% 6.0% 2.2% 5.8%

Inflation (own-firm products) 1.9% 4.4% 0.8% 3.0%

Revenue growth 6.9% 11.2% 2.8% 11.1%

Earnings growth* 9.6% 18.0% 7.5% 6.3%

Dividends* 8.5% 21.4% 1.6% 5.9%

Share Repurchases* 14.9% 0.8% 0.0% 1.7%

Cash on balance sheet* 6.7% 0.2% 7.8% 7.0%

Mergers and Acquisitions

36.8% plan to acquire; Foreign

targets in 24.6% of acquisitions.







Percentages indicate this quarter’s expected growth rates for the next twelve months * Indicates public firms only

First Quarter 2013


All The figures quoted above are taken from the Global CFO Survey

for the first quarter of 2013. The survey concluded March 8, 2013.

Every quarter, CFOs in Europe, the US, Asia and China are questioned

about their economic expectations. Current records go back 68

quarters. The CFO Survey is conducted jointly by Tilburg University,

Duke University (Durham, North Carolina) and CFO Magazine.

Previous editions of the CFO Survey can be found at

www.cfosurveyeurope.org. For further information, please contact mrs.

Rian van Heur, TiasNimbas Business School, tel.+31-(0)-134668637 or

e-mail [email protected]

CFO Survey Europe team

Kees Koedijk Professor Financial Management

Dean & Director TiasNimbas Business School

Christian Staupe

Policy Advisor Dean’s Office

Rian van Heur (contactperson) Corporate Marketing & External Relations

[email protected]

+31-(0)-13 466 8637

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CFO Survey Europe Report Q1 2013 - TIAS · 2017-05-23 · Receive a Big Blow in 2013 CFO Survey...

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