What Can CFOs Plan For Moving Forward? Economic Recovery And Increased M&A Activity

By Bill Fink, Head of U.S. Middle Market Banking and Forbes Council Member

This article was originally published on Forbes.

It seems like things are looking up. The vaccine rollout continues in the United States. There are positive signs on the horizon, such as rising copper and nickel prices that often portend an uptick in manufacturing and commerce, and economists are projecting strong GDP growth for the year. Still, it can be difficult for CFOs to forecast when there is so much uncertainty.

To help get a sense of the industry landscape, TD Bank conducted a survey during the pandemic of more than 350 executive financial decision makers from midsize to large companies with revenue from $50 million to $500 million-plus. The results paint a hopeful picture for the coming months.

Great Expectations

The pandemic has not impacted everyone equally. Some industries were hit hard by global restrictions on travel and indoor gatherings, such as hospitality and entertainment, while others, such as grocers and food services, have done quite well. Even within industries, performance has varied. Based on a report from Broughton Capital, 3,140 trucking companies closed in 2020, but transportation companies that handled food shipments or e-commerce deliveries did quite well.

Optimism abounds, however. According to our survey, 41% of respondents looked forward to a strong economic recovery, and 26% expected a positive but slower recovery. Only 2% expected a more challenging economic environment in 2021 compared with 2020.

Companies also expect to grow their employee base this year, with 54% saying they planned to hire staff in the next 12 months. Over 40% of companies planned to keep staffing levels even, and only 5% reported planning to reduce staff in the next 12 months.

When identifying the biggest challenge to operations, complications from the pandemic was the leading response.

Recovery has taken different shapes across industries, and CFOs can expect this tale of two economies to continue. It is also possible there will be pent-up demand in the short term, as was seen with dentist appointments earlier in the year: Many Americans delayed dental care during the pandemic, leading to a surge in appointments as dentists reopened.

Expect Increased Mergers And Acquisitions (M&A) Activity

Despite these challenges, companies have big plans. Covid-19 provided an opportunity for companies to pivot and reimagine their businesses. In fact, 61% of respondents said that Covid-19 had a positive impact on business objectives.

Companies also reported planning for expansion, with 32% saying they are planning to launch major new products or expand into new market verticals. And a PwC survey found that 53% of surveyed companies were planning to increase their M&A investment.

Low interest rates continue to buoy company valuations, making acquisitions slightly more expensive but slightly more appealing primarily because the risk premium to acquire debt is reduced when interest rates are low. However, 2021 promises to be a year of increased M&A activity, especially given the prospect of an increase in the federal corporate income tax rate as part of President Biden’s infrastructure spending plan.

If President Biden doesn’t actually raise corporate tax rates, the pent-up demand from the past year is likely to increase M&A activity in the latter half of 2021 and for the next several years. This trend will be further driven by the radical differences in company performance over the pandemic. Strong performers are well positioned to buy competitors, and historically low interest rates and high levels of liquidity in the lending market provide CFOs ample sources of financing for M&A activity.

While liquidity is high now, CFOs should act sooner than later, as demand for financing may surge. An overwhelming 92% of those surveyed said that they have additional financing needs in 2021. The uncertainty around the pandemic has changed risk management approaches and stalled demand as companies wait to see what occurs with the vaccine rollout and other events this year.

Inflation, Interest Rates And International Trade

As CFOs look toward the rest of 2021 and beyond, inflation and the strength of the dollar are two major concerns. It is unlikely inflation will change significantly in the next 12 months, but on a longer horizon, there are concerns that all the pent-up liquidity from stimulus relief might lead to a surge in demand that will outpace supply and drive inflation. Additionally, international companies are worried that the dollar may weaken in the years ahead — which could be a boon for exporters but a vulnerability for importers.

Asymmetrical recovery timelines could add to these complications. In Europe, many leaders have written about the possibility that European companies might be acquired by Asian companies because Asia is recovering from the pandemic ahead of Europe. The U.S. is also recovering quicker than Europe, but less quickly than parts of Asia when measured by GDP. These asymmetrical recoveries could increase volatility.

CFOs can talk with their financial institutions to help come up with the best possible financing solutions. Lenders can help provide advice and products like foreign currency hedges to help offset any future concerns. By acting now, they can beat the rush for financing and best position their company for the second half of the year.

Want to discuss more? Reach out to Bill Fink at William.Fink@td.com.


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