2013 is poised to be an important year for companies as they maneuver through tepid and uncertain economic growth, recessionary conditions in the Eurozone, debt ceiling and spending concerns in the US, global austerity, and unprecedented monetary easing by central banks. Managing through these uncertainties while preparing for an economic rebound is the overarching corporate finance theme for 2013.
The ongoing debt crisis continues to weigh heavily on European companies. Companies in both periphery and core European countries are trading at sizeable valuation discounts, necessitating a shift from a treasury-focused contingency planning approach to a broader strategic assessment of options including re-domiciling, overseas listings, and lowering business exposures to Europe. Even non-European companies are being affected and should consider strategies to manage their exposures to Europe in the current environment.
Globally, there continues to be a significant pullback in new investment and a moderate decline in M&A activity. The most recent increase in capital investment was one of the lowest over the past decade amidst economic and policy uncertainty and a lack of visibility around growth prospects. As a result, valuation multiples globally are below historical norms. In 2013, articulating a credible growth strategy will be an essential element in achieving improved valuations.
At the same time, improvement in the global economic outlook and resolution of policy uncertainties in the US and Europe have the potential to trigger a rebound in investment and M&A. All other factors, such as balance sheet strength, capital availability, cost of capital, and cash balances are highly favorable for such a rebound. We note Japanese companies responded to such factors with a wave of outbound M&A in 2012. Globally, the market reaction to large M&A has been more positive in 2012 than in recent years.
Companies that are not sufficiently proactive face the risk of shareholder activism. European companies may be particularly ripe for more activism with depressed valuations and a lack of visibility on growth prospects. Even well-performing companies are vulnerable to activism if they have excess liquidity and large cash balances. Say on Pay votes are also becoming an important forum for shareholders to express discontent around corporate performance. Hence, developing a plan for the optimal deployment of excess liquidity should be a key priority in 2013.
Capital deployment in this environment requires the ability to pursue attractive investments wherever they arise and companies need to strive for flexibility in their ability to allocate capital across businesses and geographies. Attractive financing market conditions and valuations make debt financed acquisitions an effective way for companies to position themselves in advance of an economic recovery. Strategic buyers should also pay close attention to buy-side as well as sell-side opportunities involving private equity firms.
As economic conditions recover, inflation and the cost of capital will rise. In addition, Basel III rules will tighten credit availability for certain borrowers. Therefore, companies should continue to diversify their funding sources and push debt maturities further out through long-dated capital market issuance while capital market access and long-term funding costs remain highly favorable.