Corporate Development Insights from the 2022 CDO Forum

Recent impacts to the marketplace have been both extraordinary and age-old. The market continues to be an active, evolving, and unfolding place—presenting complex challenges for corporate development officers (CDOs) and other stakeholders shaping today’s mergers and acquisitions (M&A) strategies. At the first quarter 2022 CDO Forum, Riveron experts met with Brian Belski, the chief investment strategist at BMO Capital Markets, to offer insights on what’s happening in the economy due to recent political events and unfolding pandemic-driven circumstances.

What a multi-year return to normalcy means for the market

Shaping business strategies amid signs of instability

2020 and 2021 are being referred to as the “black swan” pair of years in several arenas. In particular, the marketplace is in a period of unparalleled territory. Historical patterns may not apply especially in light of the potential volatility presented by recent events in Ukraine.

Recovery and returning to any sense of normalcy may take years to discover. For the time being, interest rates remain exceedingly low as governments and markets gingerly emerge from being disrupted to the core. The heavy involvement of the government for the last twenty-two years means that companies are liquid and executing with great efficiency.

Experts say that the pace is unsustainable, with economists predict that the government is poised to potentially raise rates multiple times in the next year. The prediction is that the first half of 2022 will be exceptionally bumpy, with rougher patches threatening in the second half of the year.

The second derivative and learning from history

Since the financial crisis, treasury bonds have averaged at 2.2%, compared to the 6% ten-year-average for the last seventy years. The current generation of investors tend to purchase stocks only when interest rates go down. Experts suspect that this is due in part to having been brought up in an environment of Quantitative Easing (QE), or the unconventional practice of central banks purchasing longer-term securities to encourage lending and investing.

Eventually, this artificial increase of money supply in the marketplace will come to an end, and experts believe that it would benefit newer investors to look to traditional and historical practices of investing to limit exposure and reduce volatility. Research continues to show that stocks will eventually rise again, causing interest rates to also rise.

Based on these assessments, the theme for 2022 is the “year of second derivatives.” In terms of price performance, this suggests that there will be less earnings, lower valuations, and interest rates will not be as strong as they have been for a period of time.

Inflation as a buzz word making for inflated headlines

The topic of inflation is a popular headline, sounding alarms that purchasing power is on the decline and that added costs are getting passed onto the consumer at an unsustainable rate. Riveron experts believe that inflation is only part of what is taking place amid disruptive forces and risks such as supply chain, labor shortages, and retention. However, inflation has become the current unknown. It can be difficult to normalize companies’ financial results relative to inflation and expectations of future results.

The positive lessons learned from COVID-humility

As previously discussed, COVID disrupted America’s supply chain in an unprecedented way. It humbled our marketplace to reconsider where and how our goods are made. Historically, the need for consumers to be able to walk into a store and purchase the good with ease and predictability drove up production. Technology companies would make a hundred thousand widgets when in reality, they may only have needed a thousand. When the supply chain channels began breaking down, production grew smarter and more efficient.

Post-COVID, there are opportunities to reset expectations between companies, manufacturers, and consumers. Experts emphasize that we should be investing in these domestic production lines and shortened delivery routes for unilateral benefit.

Playing smart defense to prepare for future offense

As themes continue to emerge in the post-COVID economy, the market will look to correct negative impacts. Experts reflect on historical reactions to major events and warn companies to try and not over-correct.

One example is that companies experienced a severe disruption in supply chain during COVID. As a result, a popular priority is that companies are looking at bringing back manufacturing to America to ensure that their customers will not be cut off from products in the future. At some point though, the market will reprioritize lower costs and look to go offshore again.

Experts who know this pattern predict that for the next few years, companies will focus on playing defense and consumers will pay for consistency. The next three to five years will be about building up capacity and restoring a sense of control. Over time though, as goes the pattern of both good and bad evolutions of the market, looking to gain global growth positions will once again become the most urgent matter at hand.

Many global patterns will impact markets and corporate growth

Looking for patterns as history repeats itself

In 2000, the majority of mergers and acquisition (M&A) deals were done with stock. The next two spikes in 2007 and then most recently were done with cash and financing. Experts predict companies will return to dealing in stocks in the next wave of M&A deals. As interest rates rise, the underlying cost of financing limits the flexibility to finance deals with debt, causing the potential valuation to constrict.  Conversely, with the expansion of public company multiples raising stock prices to historical highs, the ability to use one’s stock as currency to support a transaction becomes proportionately more valuable.

Ukraine and Russia’s impact on the US market economy

[Note: while forming a written recap of this discussion, Russia has invaded Ukraine and the United States is involved in placing sanctions and pulling companies out of Russia. The goal remains to find ways to limit Russia’s access to resources while not broadening the war.]

Experts have sought to temper reactions to the geopolitical events caused by Russia’s invasion into Ukraine because the situation is so volatile. In most cases, because portfolios are rebalanced every quarter, diverse investments should preserve the performance of portfolios even amidst the turmoil.

Some financial leaders believe that Americans would have had more leverage in limiting exposure if they had placed sanctions on Russia as soon as Russian troops lined the borders weeks ago. The issue to consider at this point is that Russian troops are inside Ukraine, limiting the world’s ability to effectively warn Russia to back off in a meaningful way without more extreme measures.

With the largest land mass in Europe, Ukraine produces much of the oil and natural gas. They are also a significant agricultural producer, which the world will feel in the near term. From an investing standpoint, it will be important to spend on fertilizer stocks and other stocks related to agriculture as the world will require higher yields from companies outside of Ukraine.

China’s policies and the paths ahead

As a closed society, China’s role in recent market events has continued to not benefit the global community. The complication and layering of political, economic, and ethical issues continue to exasperate financial dealings with the country as a whole. Policies and trade relations in China may become increasingly hard to navigate as environmental, social, and governance (ESG) factors continue to shape consumer sentiment and investor strategy. Some challenges likely to surface include concerns around wages, human rights, alignment in military conflicts, and other socio-political factors that give investors pause and could cause supply chain and other market implications.

Cryptocurrency’s staying power and diligence check 

Cryptocurrency is making its presence known in the market, but in a way that experts still find puzzling. As a non-correlated asset, its potential volatility is significant enough for investors and banks to question their staying power. For example, if central banks around the world come up with their own electronic currency, smaller independent currencies could become inviable overnight. The democratized and nebulous nature of the crypto system would break down with such a centralized adoption.

The product is attractive in its deregulated efficiency for now, but as it gains attention and grows in value, governments will seek opportunities to regulate the product. Experts say that the current overvaluations of intangible products read similarly to what happened during the dot-com era before the burst.

Corporate development strategies must follow in step with workplace trends

Impacts of working from home are here to stay

Much has been discussed about how the pandemic disrupted the way we live and work. On a positive note, many found that working from home offers high efficiency and a better quality of life. Experts say that for many companies, five days in the office has quickly become a bygone era.

As working from home has become more prevalent, America is experiencing a mass exodus from major cities. As the pendulum has swung in the direction of people not needing to go into an office every day of the week, employees have vastly widened their search for places to relocate. Texas, Tennessee, Wyoming, South Dakota, and the southeast are all seeing an unprecedented influx of new residents from big cities looking to call these relatively slower paced locations home.

Corporations are adjusting to these expectations and need to continue to be patient in terms of monetary policy, earnings, and corporate actions. 

Value of real time exchange with colleagues and replicating their effect

In the midst of such an exodus from major cities, service providers in particular are experiencing the negative impact from the loss of in person office culture.

Inter-generational colleague interchange has surfaced as an essential benefit of having teams office together. Companies are realizing through absence, that the happenstance and side-bar moments of interaction are when leadership is able to organically pass down lessons learned. These moments have previously played a key role in forming the next generation of the company.

For optimal success, corporations must look for opportunities to replicate these once-natural opportunities for growth and training, while accommodating the current realities and expectations for transient workplaces.

Insight for the younger generation of workers

Leaders point out that as younger generations of workers are being taught how to work in these unprecedented circumstances, it is important for professionals to continue building upon their in-person communication skills. Going back to the basics, professionals who are young in their field should practice the three “C’s” of communication: being clear, concise, and consistent.

The newer generation of workers are wired for efficiency due to the speed at which technology provides information and access. As workers, older leaders note that the newer generation is good at working in spurts, but perhaps weaker in longer form ways of paying attention. The ability to sit and work for ten hours has dissipated. Ultimately, generations should learn how to establish common ground. For example, as long as the work gets done, leaders should expect that communication and lifestyles may look different. Younger generation workers should understand expectations and value real-time responsiveness.

Across topics including supply chain disruptions, inflation, and the M&A deal landscape, the insights of experts who have lived through several cycles of the good and the bad offer grounding perspective in times that feel abstract. The test for becoming a seasoned professional working in finance is reflected in how one handles the adversity of the marketplace, not only the successes.