Anil Shivdasani

Ajay Khorana

Arturo Lorente

Elinor Hoover

Gabriel Kimyagarov

Download

Charles Hulac

The strength of the equity markets masks the largest valuation gap between the highest- and lowest-valued companies observed in a decade. This gap continues to widen, driven by differences in innovativeness, growth, balance sheet strength, earnings stability, and exposure to protectionism risk. In particular, the potential impact of protectionism requires firms to be acutely focused on maintaining strong corporate fundamentals, optimizing the supply chain, and prioritizing strategic initiatives. Investor receptivity to M&A remains positive, despite concerns over the prolonged duration of the current cycle. In fact, we observe that while M&A announcements are well-received through business cycles, highly levered deals announced in the last year of an expansion under-performed in the long run. We also find that since size and scale are increasingly relevant for competitive positioning, there is an ongoing need for firms to capitalize on strategic opportunities to improve market share and competitive strength in their industries. Financial sponsor firepower has reached new highs, and now includes larger and more diverse pools of capital. This trend is enabling sponsors to be more competitive and pursue larger targets, while employing more aggressive leverage levels. Although lower rates are often a symptom of lower long-run growth expectations, we do not estimate this to materially dampen the LBO outlook given the associated decrease in financing costs. Capital deployment will remain a key theme in 2020 given high corporate liquidity, low interest rates, and continued activist pressures. Firms should lower investment hurdle rates commensurate with recent declines in cost of capital driven by lower rates and greater leverage. Moreover, in today’s low-rate environment, firms with a sustainable dividend policy command a robust valuation premium relative to peers. Firms should adopt a dividend policy that ensures dividend sustainability through the cycle. Share repurchases will remain an attractive way to return capital to shareholders given their flexibility. Recent focus on shareholder distributions and M&A has led many firms to migrate down the credit spectrum. This trend may expose some firms to credit and valuation pressures in the event of an economic slowdown, a vulnerability that is amplified by protectionism-related concerns. Firms will need to proactively manage these risks by publicly articulating a capital structure plan—to provide commitment and clarity—and recalibrating their funding strategies. Firms face a delicate balancing act between building balance sheet strength and managing activist pressures. In particular, activists continue to target firms with robust liquidity positions. Additionally, activists are increasingly focusing on larger companies, urging them to consider all strategic options to maximize shareholder value, including buyouts. These trends require firms to evaluate all capital allocation alternatives and ownership structures. Focus on environmental, social, and governance (ESG) issues has risen sharply in financial markets in recent years. The menu of ESG-aligned financing options is rapidly expanding as is the influence of ESG factors on credit ratings. As the reliability and acceptance of ESG metrics expands, they will increasingly become a priority in corporate decision making. Governance is also increasingly relevant for the IPO market. In addition, investors are paying particular attention to a firm’s financial fundamentals and path to profitability. While the overall macro environment is supportive of IPO activity, we encourage firms to be proactive in accessing the IPO market in 2020 given the evolving geopolitical landscape.Authors: Ajay Khorana,Anil Shivdasani,Gabriel Kimyagarov,Charles Hulac,Arturo Lorente,

The strength of the equity markets masks the largest valuation gap between the highest- and lowest-valued companies observed in a decade. This gap continues to widen, driven by differences in innovativeness, growth, balance sheet strength, earnings stability, and exposure to protectionism risk. In particular, the potential impact of protectionism requires firms to be acutely focused on maintaining strong corporate fundamentals, optimizing the supply chain, and prioritizing strategic initiatives. Investor receptivity to M&amp;A remains positive, despite concerns over the prolonged duration of the current cycle. In fact, we observe that while M&amp;A announcements are well-received through business cycles, highly levered deals announced in the last year of an expansion under-performed in the long run. We also find that since size and scale are increasingly relevant for competitive positioning, there is an ongoing need for firms to capitalize on strategic opportunities to improve market share and competitive strength in their industries. Financial sponsor firepower has reached new highs, and now includes larger and more diverse pools of capital. This trend is enabling sponsors to be more competitive and pursue larger targets, while employing more aggressive leverage levels. Although lower rates are often a symptom of lower long-run growth expectations, we do not estimate this to materially dampen the LBO outlook given the associated decrease in financing costs. Capital deployment will remain a key theme in 2020 given high corporate liquidity, low interest rates, and continued activist pressures. Firms should lower investment hurdle rates commensurate with recent declines in cost of capital driven by lower rates and greater leverage. Moreover, in today&rsquo;s low-rate environment, firms with a sustainable dividend policy command a robust valuation premium relative to peers. Firms should adopt a dividend policy that ensures dividend sustainability through the cycle. Share repurchases will remain an attractive way to return capital to shareholders given their flexibility. Recent focus on shareholder distributions and M&amp;A has led many firms to migrate down the credit spectrum. This trend may expose some firms to credit and valuation pressures in the event of an economic slowdown, a vulnerability that is amplified by protectionism-related concerns. Firms will need to proactively manage these risks by publicly articulating a capital structure plan&mdash;to provide commitment and clarity&mdash;and recalibrating their funding strategies. Firms face a delicate balancing act between building balance sheet strength and managing activist pressures. In particular, activists continue to target firms with robust liquidity positions. Additionally, activists are increasingly focusing on larger companies, urging them to consider all strategic options to maximize shareholder value, including buyouts. These trends require firms to evaluate all capital allocation alternatives and ownership structures. Focus on environmental, social, and governance (ESG) issues has risen sharply in financial markets in recent years. The menu of ESG-aligned financing options is rapidly expanding as is the influence of ESG factors on credit ratings. As the reliability and acceptance of ESG metrics expands, they will increasingly become a priority in corporate decision making. Governance is also increasingly relevant for the IPO market. In addition, investors are paying particular attention to a firm&rsquo;s financial fundamentals and path to profitability. While the overall macro environment is supportive of IPO activity, we encourage firms to be proactive in accessing the IPO market in 2020 given the evolving geopolitical landscape.Authors: Ajay Khorana,Anil Shivdasani,Gabriel Kimyagarov,Charles Hulac,Arturo Lorente,

The global corporate sector is entering 2020 on a cautiously optimistic note. GDP growth is expected to pick up globally, even as it slows slightly in the U.S. Accommodative monetary policy has pushed funding costs for growth initiatives to record lows. At the same time, economic headwinds arising from the evolving geopolitical and trade landscape favor strengthening corporate balance sheets.

2020 Corporate Finance Priorities

As GDP growth momentum slows and becomes less balanced across the globe, developing a robust growth strategy becomes a key priority for companies in all sectors. We find that investors historically preferred organic growth, evidenced by higher shareholder returns for firms that mainly grew organically. However, companies will need to use acquisitions to overcome a lack of organic growth opportunities; those that have historically done so performed noticeably better than those who abstained from large acquisitions despite lagging growth. On a positive note, firms are entering 2019 with significant capital deployment firepower. A large share of the firepower is held by a handful of technology titans, who have expanded aggressively and successfully beyond their sector boundaries. These titans now account for an unprecedented share of total equity market value and growth expectations. In 2019, the pressure on companies across wide swaths of the global economy to effectively fight these titans will only intensify. Those companies most at risk will need to use their firepower judiciously to defend their competitive positions. As firms evaluate transformative M&A, they must pay attention to growing execution risks. Regulatory headwinds, along with valuation disagreements and activist pressures, have impacted the M&A environment in recent years, resulting in an increase in withdrawn deals. Nonetheless, failed attempts at large acquisitions were not penalized by investors. Hence, management and boards should focus on managing the risks surrounding large transactions rather than delaying their strategic plans. A strong M&A market in 2018, U.S. tax reform, shareholder activism, and increased appetite from private equity will likely drive divestiture and LBO activity in 2019. Proactive and tax-efficient pruning that improves the rate of return on capital is particularly rewarded by investors. LBO activity in 2019 will increasingly focus on larger, whole-company buyouts, driven by a shift towards more focused firms and market volatility potentially slowing the pace of M&A. The larger deal size may give rise to more consortium deals, expanding the universe of buyout candidates and requiring the participation of new partners to traditional private equity. Activism will likely continue its role in corporate boardrooms in 2019, following a strong year of campaign activity in 2018. Public campaigns are, however, only part of the story since investors of all kinds now engage more actively with their portfolio companies. Therefore, the challenge for executives and directors in 2019 is to proactively mitigate the broader risk of investor discontent before it gives rise to a disruptive campaign. This approach should involve enhanced investor relations, analytics to better understand and anticipate investor sentiment and behavior, as well as active cultivation of a supportive long-term investor base. Mounting trade-related tensions will remain a key risk in 2019. Earnings estimates have already been significantly lowered for both U.S. companies with exposure to China and Chinese firms with exposure to the U.S. These trade tensions should prompt a re-evaluation of global supply chains and production locations. They also merit revisiting risk management policies, as policy uncertainty may continue to spill into the broader macroeconomic environment. Trade tensions and slowing growth present a particular challenge in emerging markets, but these markets still offer attractive long-term growth prospects, especially when taking into account currently depressed equity valuationsAuthors: Authors: Authors: Authors: Authors: Authors: Authors: Authors: Authors: Authors: Authors: Authors: Ajay Khorana,Anil Shivdasani,Gabriel Kimyagarov,Charles Hulac,Arturo Lorente,Authors: Ajay Khorana,Anil Shivdasani,Gabriel Kimyagarov,Charles Hulac,Arturo Lorente,Authors: Ajay Khorana,Anil Shivdasani,Gabriel Kimyagarov,Charles Hulac,Arturo Lorente,Authors: Authors: Ajay Khorana,Anil Shivdasani,Gabriel Kimyagarov,Charles Hulac,Arturo Lorente,Authors: Ajay Khorana,Anil Shivdasani,Gabriel Kimyagarov,Charles Hulac,Arturo Lorente,Authors: Ajay Khorana,Anil Shivdasani,Gabriel Kimyagarov,Charles Hulac,Arturo Lorente,Authors: Ajay Khorana,Anil Shivdasani,Gabriel Kimyagarov,Charles Hulac,Arturo Lorente,Authors: Ajay Khorana,Anil Shivdasani,Gabriel Kimyagarov,Charles Hulac,Arturo Lorente,

As GDP growth momentum slows and becomes less balanced across the globe, developing a robust growth strategy becomes a key priority for companies in all sectors. We find that investors historically preferred organic growth, evidenced by higher shareholder returns for firms that mainly grew organically. However, companies will need to use acquisitions to overcome a lack of organic growth opportunities; those that have historically done so performed noticeably better than those who abstained from large acquisitions despite lagging growth. On a positive note, firms are entering 2019 with significant capital deployment firepower. A large share of the firepower is held by a handful of technology titans, who have expanded aggressively and successfully beyond their sector boundaries. These titans now account for an unprecedented share of total equity market value and growth expectations. In 2019, the pressure on companies across wide swaths of the global economy to effectively fight these titans will only intensify. Those companies most at risk will need to use their firepower judiciously to defend their competitive positions. As firms evaluate transformative M&amp;A, they must pay attention to growing execution risks. Regulatory headwinds, along with valuation disagreements and activist pressures, have impacted the M&amp;A environment in recent years, resulting in an increase in withdrawn deals. Nonetheless, failed attempts at large acquisitions were not penalized by investors. Hence, management and boards should focus on managing the risks surrounding large transactions rather than delaying their strategic plans. A strong M&amp;A market in 2018, U.S. tax reform, shareholder activism, and increased appetite from private equity will likely drive divestiture and LBO activity in 2019. Proactive and tax-efficient pruning that improves the rate of return on capital is particularly rewarded by investors. LBO activity in 2019 will increasingly focus on larger, whole-company buyouts, driven by a shift towards more focused firms and market volatility potentially slowing the pace of M&amp;A. The larger deal size may give rise to more consortium deals, expanding the universe of buyout candidates and requiring the participation of new partners to traditional private equity. Activism will likely continue its role in corporate boardrooms in 2019, following a strong year of campaign activity in 2018. Public campaigns are, however, only part of the story since investors of all kinds now engage more actively with their portfolio companies. Therefore, the challenge for executives and directors in 2019 is to proactively mitigate the broader risk of investor discontent before it gives rise to a disruptive campaign. This approach should involve enhanced investor relations, analytics to better understand and anticipate investor sentiment and behavior, as well as active cultivation of a supportive long-term investor base. Mounting trade-related tensions will remain a key risk in 2019. Earnings estimates have already been significantly lowered for both U.S. companies with exposure to China and Chinese firms with exposure to the U.S. These trade tensions should prompt a re-evaluation of global supply chains and production locations. They also merit revisiting risk management policies, as policy uncertainty may continue to spill into the broader macroeconomic environment. Trade tensions and slowing growth present a particular challenge in emerging markets, but these markets still offer attractive long-term growth prospects, especially when taking into account currently depressed equity valuationsAuthors: Authors: Authors: Authors: Authors: Authors: Authors: Authors: Authors: Authors: Authors: Authors: Ajay Khorana,Anil Shivdasani,Gabriel Kimyagarov,Charles Hulac,Arturo Lorente,Authors: Ajay Khorana,Anil Shivdasani,Gabriel Kimyagarov,Charles Hulac,Arturo Lorente,Authors: Ajay Khorana,Anil Shivdasani,Gabriel Kimyagarov,Charles Hulac,Arturo Lorente,Authors: Authors: Ajay Khorana,Anil Shivdasani,Gabriel Kimyagarov,Charles Hulac,Arturo Lorente,Authors: Ajay Khorana,Anil Shivdasani,Gabriel Kimyagarov,Charles Hulac,Arturo Lorente,Authors: Ajay Khorana,Anil Shivdasani,Gabriel Kimyagarov,Charles Hulac,Arturo Lorente,Authors: Ajay Khorana,Anil Shivdasani,Gabriel Kimyagarov,Charles Hulac,Arturo Lorente,Authors: Ajay Khorana,Anil Shivdasani,Gabriel Kimyagarov,Charles Hulac,Arturo Lorente,

The global corporate sector is entering 2019 on the heels of episodic turbulence in 2018 and with mixed signals for the year ahead. On the one hand, current corporate and macroeconomic fundamentals remain sound, with continued GDP growth, low unemployment, and healthy corporate balance sheets. On the other hand, some financial market indicators, such as a flat U.S. yield curve, higher equity volatility, and rising credit spreads, point to increasing risks. Rising U.S. interest rates may also continue to exert upward pressure on the dollar with increasing risks for emerging markets. Against this backdrop, we see equity markets rewarding firms for maintaining financial flexibility.

2019 Corporate Finance Priorities

In contrast, the European Central Bank has extended its quantitative easing program and Japan has slipped into another technical recession. China has acknowledged additional downward revisions in its GDP growth targets, confirming fears of a slowdown in the world’s largest growth engine. This reversion in Chinese demand is exacerbating pressures on global commodity markets. All firms will need to plan for the adverse impact of heightened commodity price volatility on corporate revenue growth. These macroeconomic divergences will require companies to rethink how they invest, expand, and continue to create value for their shareholders. In response to investor demand for top-line growth and evolving activist agendas, companies have turned to M&A and restructuring alternatives more than ever before. Strong U.S. fundamentals, low financing costs, and favorable investor responses to M&A have encouraged growth-challenged firms to strive for larger and more transformative deals in 2015, leading to the highest level of M&A activity in history. If equity valuations are sustained and market volatility remains in check, the M&A momentum will likely continue in 2016. However, companies will need to exercise discipline in light of high equity valuations and a recent decline in equity investor response to M&A announcements. Moreover, since a third of all companies globally are not earning their cost of capital, corporate executives will need to proactively consider restructuring alternatives in 2016. Corporates will also need to reevaluate their capital allocation and distribution policies in 2016. Over the past several years, shareholder distributions have represented an important component of shareholder returns. However, as market valuations have risen, the undervaluation signal associated with buybacks has become more muted. Investors are also closely scrutinizing repurchase-driven engineered EPS growth. In 2016, deploying capital organically or through M&A could be a more effective path to value enhancement for those firms with the requisite balance sheet strength. While investment-grade firms should remain relatively insulated from potential market turbulence given the record amount of liquidity on their balance sheets, these firms are likely to face shareholder pressures to deploy excess capital. Noninvestment-grade corporates, however, could face difficult tradeoffs between investment and the need for capital preservation if credit markets tighten. We are currently observing the widest spread differential between sectors in the top and bottom quartiles of the high-yield universe. Companies in commodity exposed sectors such as energy and mining are likely to require more drastic measures to defend their balance sheets. A closer evaluation of the tradeoff between asset sales, dividend cuts, capital expenditure reductions, and equity issuances – which have varying equity market responses relative to the amount of incremental liquidity generated – will be warranted. In the emerging markets, particularly in Asia, the strong feedback loop between the corporate and financial sectors – reflected in the simultaneous rising of bank and corporate credit spreads – will necessitate that corporates opportunistically diversify their funding sources and pursue customized structured solution alternatives. A potential increase in risk premia affecting both the cost of debt and equity for bank-reliant corporates will pose an added challenge for these EM firms as they seek investment opportunities that earn a return commensurate with their cost of capital. Authors: Ajay Khorana,Anil Shivdasani,Gabriel Kimyagarov,Arturo Lorente,Charles Hulac,Authors: Ajay Khorana,Anil Shivdasani,Gabriel Kimyagarov,Arturo Lorente,Charles Hulac,Authors: Authors: Ajay Khorana,Anil Shivdasani,Gabriel Kimyagarov,Arturo Lorente,Charles Hulac,Authors: Ajay Khorana,Anil Shivdasani,Gabriel Kimyagarov,Arturo Lorente,Charles Hulac,

In contrast, the European Central Bank has extended its quantitative easing program and Japan has slipped into another technical recession. China has acknowledged additional downward revisions in its GDP growth targets, confirming fears of a slowdown in the world&rsquo;s largest growth engine. This reversion in Chinese demand is exacerbating pressures on global commodity markets. All firms will need to plan for the adverse impact of heightened commodity price volatility on corporate revenue growth. These macroeconomic divergences will require companies to rethink how they invest, expand, and continue to create value for their shareholders. In response to investor demand for top-line growth and evolving activist agendas, companies have turned to M&amp;A and restructuring alternatives more than ever before. Strong U.S. fundamentals, low financing costs, and favorable investor responses to M&amp;A have encouraged growth-challenged firms to strive for larger and more transformative deals in 2015, leading to the highest level of M&amp;A activity in history. If equity valuations are sustained and market volatility remains in check, the M&amp;A momentum will likely continue in 2016. However, companies will need to exercise discipline in light of high equity valuations and a recent decline in equity investor response to M&amp;A announcements. Moreover, since a third of all companies globally are not earning their cost of capital, corporate executives will need to proactively consider restructuring alternatives in 2016. Corporates will also need to reevaluate their capital allocation and distribution policies in 2016. Over the past several years, shareholder distributions have represented an important component of shareholder returns. However, as market valuations have risen, the undervaluation signal associated with buybacks has become more muted. Investors are also closely scrutinizing repurchase-driven engineered EPS growth. In 2016, deploying capital organically or through M&amp;A could be a more effective path to value enhancement for those firms with the requisite balance sheet strength. While investment-grade firms should remain relatively insulated from potential market turbulence given the record amount of liquidity on their balance sheets, these firms are likely to face shareholder pressures to deploy excess capital. Noninvestment-grade corporates, however, could face difficult tradeoffs between investment and the need for capital preservation if credit markets tighten. We are currently observing the widest spread differential between sectors in the top and bottom quartiles of the high-yield universe. Companies in commodity exposed sectors such as energy and mining are likely to require more drastic measures to defend their balance sheets. A closer evaluation of the tradeoff between asset sales, dividend cuts, capital expenditure reductions, and equity issuances &ndash; which have varying equity market responses relative to the amount of incremental liquidity generated &ndash; will be warranted. In the emerging markets, particularly in Asia, the strong feedback loop between the corporate and financial sectors &ndash; reflected in the simultaneous rising of bank and corporate credit spreads &ndash; will necessitate that corporates opportunistically diversify their funding sources and pursue customized structured solution alternatives. A potential increase in risk premia affecting both the cost of debt and equity for bank-reliant corporates will pose an added challenge for these EM firms as they seek investment opportunities that earn a return commensurate with their cost of capital. Authors: Ajay Khorana,Anil Shivdasani,Gabriel Kimyagarov,Arturo Lorente,Charles Hulac,Authors: Ajay Khorana,Anil Shivdasani,Gabriel Kimyagarov,Arturo Lorente,Charles Hulac,Authors: Authors: Ajay Khorana,Anil Shivdasani,Gabriel Kimyagarov,Arturo Lorente,Charles Hulac,Authors: Ajay Khorana,Anil Shivdasani,Gabriel Kimyagarov,Arturo Lorente,Charles Hulac,

The global landscape in 2016 remains uncertain with increased divergence in economic prospects around the world. Improving economic fundamentals in the U.S. have provided a catalyst for the first increase in interest rates by the Federal Reserve in nearly a decade, signaling confidence in the continued strength and sustainability of a U.S. recovery.

2016 Corporate Finance Priorities

Improving economic fundamentals in the U.S. will likely provide a catalyst for the Fed to unwind its balance sheet and increase rates. As in previous tightening cycles, we expect a gradual increase in rates and a flatter yield curve. Corporate fundamentals are becoming more important drivers of equity valuations as the Fed unwinds its balance sheet, gradually removing the support global equity markets have enjoyed in recent years. Equity valuations today are also driven more by growth prospects than at any time since the global financial crisis. Investors’ greater focus on growth, strong corporate fundamentals, and low funding costs will encourage the pursuit of M&A. Global M&A volumes reached $3.7 trillion in 2017 and acquisition multiples hit all-time highs. Although often justified by the target’s higher growth prospects, high acquisition multiples are nonetheless being challenged by activists. We expect activist interference in M&A to be a recurring theme in 2018. Activists will continue to influence highly strategic decisions involving M&A, break-ups, and management and board control. In many instances, executives and directors are being questioned, and often replaced. U.S. tax reform will require companies across the globe to rethink their M&A, capital allocation, and financial policies. Repatriated foreign cash will provide flexibility for M&A, and changes to the taxation of U.S. companies’ foreign earnings could help U.S. corporations compete for foreign assets. A lower tax rate will make asset sales significantly more attractive for sellers while also raising the returns for some financial sponsors. For cash-rich U.S. multinationals, tax reform could trigger a wave of share repurchases. Moreover, immediate expensing of capital expenditures could spur an increase in new investments. Firms must proactively react to technological disruption with both organic and inorganic investments, as the pace of change will continue to accelerate in 2018. Corporates will, therefore, need to revisit capital allocation, both to position for faster growth and to enhance returns on capital. Preserving incremental capacity for funding capital investments and acquisitions may prove more rewarding going forward, especially since the market response to shareholder distributions is noticeably smaller today. As capital gravitates from active to passive management, corporates and investors should pay close attention to the impact on price discovery, trading liquidity, and market valuations. We find that high levels of passive ownership may lead valuations to deviate further from fundamental value. Firms in 2018 must understand passive shareholders’ investment objectives, anticipate their response to strategic transactions and activist campaigns, and adjust their shareholder communication strategy accordingly. Proactively managing cyber risk is becoming a key imperative. As many companies have recently experienced first-hand, security breaches often result in severe financial consequences. Firms need to re-examine their cybersecurity investment priorities and establish an incident response plan to tackle this growing risk. Simpler hedge accounting rules will facilitate more corporate hedging activity in 2018. These new rules can lower earnings volatility both by eliminating mark-to-market noise and by encouraging firms to increase their hedging activities. In light of hedging-friendly accounting rules and the positive valuation impact associated with lower earnings volatility, a reassessment of various market risks is warranted in 2018. Authors: Anil Shivdasani,Ajay Khorana,Gabriel Kimyagarov,Authors: Anil Shivdasani,Ajay Khorana,Gabriel Kimyagarov,Authors: Anil Shivdasani,Ajay Khorana,Gabriel Kimyagarov,Authors: Anil Shivdasani,Ajay Khorana,Gabriel Kimyagarov,Authors: Authors: Anil Shivdasani,Ajay Khorana,Gabriel Kimyagarov,Authors: Anil Shivdasani,Ajay Khorana,Gabriel Kimyagarov,

Improving economic fundamentals in the U.S. will likely provide a catalyst for the Fed to unwind its balance sheet and increase rates. As in previous tightening cycles, we expect a gradual increase in rates and a flatter yield curve. Corporate fundamentals are becoming more important drivers of equity valuations as the Fed unwinds its balance sheet, gradually removing the support global equity markets have enjoyed in recent years. Equity valuations today are also driven more by growth prospects than at any time since the global financial crisis. Investors&rsquo; greater focus on growth, strong corporate fundamentals, and low funding costs will encourage the pursuit of M&amp;A. Global M&amp;A volumes reached $3.7 trillion in 2017 and acquisition multiples hit all-time highs. Although often justified by the target&rsquo;s higher growth prospects, high acquisition multiples are nonetheless being challenged by activists. We expect activist interference in M&amp;A to be a recurring theme in 2018. Activists will continue to influence highly strategic decisions involving M&amp;A, break-ups, and management and board control. In many instances, executives and directors are being questioned, and often replaced. U.S. tax reform will require companies across the globe to rethink their M&amp;A, capital allocation, and financial policies. Repatriated foreign cash will provide flexibility for M&amp;A, and changes to the taxation of U.S. companies&rsquo; foreign earnings could help U.S. corporations compete for foreign assets. A lower tax rate will make asset sales significantly more attractive for sellers while also raising the returns for some financial sponsors. For cash-rich U.S. multinationals, tax reform could trigger a wave of share repurchases. Moreover, immediate expensing of capital expenditures could spur an increase in new investments. Firms must proactively react to technological disruption with both organic and inorganic investments, as the pace of change will continue to accelerate in 2018. Corporates will, therefore, need to revisit capital allocation, both to position for faster growth and to enhance returns on capital. Preserving incremental capacity for funding capital investments and acquisitions may prove more rewarding going forward, especially since the market response to shareholder distributions is noticeably smaller today. As capital gravitates from active to passive management, corporates and investors should pay close attention to the impact on price discovery, trading liquidity, and market valuations. We find that high levels of passive ownership may lead valuations to deviate further from fundamental value. Firms in 2018 must understand passive shareholders&rsquo; investment objectives, anticipate their response to strategic transactions and activist campaigns, and adjust their shareholder communication strategy accordingly. Proactively managing cyber risk is becoming a key imperative. As many companies have recently experienced first-hand, security breaches often result in severe financial consequences. Firms need to re-examine their cybersecurity investment priorities and establish an incident response plan to tackle this growing risk. Simpler hedge accounting rules will facilitate more corporate hedging activity in 2018. These new rules can lower earnings volatility both by eliminating mark-to-market noise and by encouraging firms to increase their hedging activities. In light of hedging-friendly accounting rules and the positive valuation impact associated with lower earnings volatility, a reassessment of various market risks is warranted in 2018. Authors: Anil Shivdasani,Ajay Khorana,Gabriel Kimyagarov,Authors: Anil Shivdasani,Ajay Khorana,Gabriel Kimyagarov,Authors: Anil Shivdasani,Ajay Khorana,Gabriel Kimyagarov,Authors: Anil Shivdasani,Ajay Khorana,Gabriel Kimyagarov,Authors: Authors: Anil Shivdasani,Ajay Khorana,Gabriel Kimyagarov,Authors: Anil Shivdasani,Ajay Khorana,Gabriel Kimyagarov,

The global corporate sector is entering 2018 with strong momentum fueled by synchronized global growth, robust capital markets, a rise in corporate earnings, and recovering capital spending. The global financial system also continues to strengthen, driven by a stronger capital and liquidity position. Against this backdrop, however, executives must balance risks of an uncertain geopolitical, regulatory, trade, and legislative environment.

2018 Corporate Finance Priorities

Global corporate growth prospects are widely decoupled from economic growth prospects, with companies in some regions expected to grow at rates that significantly exceed economic growth forecasts. In this environment, the corporate finance challenge will be how to achieve growth while prudently managing heightened market and geopolitical risk. This decoupling will also heighten investors’ attention on capital deployment, and will in many cases require companies to shift their capital allocation priorities. In addition to capital deployment prioritization, this report focuses on how to use M&A and restructurings to support equity growth premiums; how global capital markets can best be tapped to fuel growth; and how to manage risk in a complicated global marketplace while driving prudent growth. Authors: Elinor Hoover,Ajay Khorana,Anil Shivdasani,Gabriel Kimyagarov,Arturo Lorente,Authors: Elinor Hoover,Ajay Khorana,Anil Shivdasani,Gabriel Kimyagarov,Arturo Lorente,Authors: Elinor Hoover,Ajay Khorana,Anil Shivdasani,Gabriel Kimyagarov,Arturo Lorente,Authors: Authors: Elinor Hoover,Ajay Khorana,Anil Shivdasani,Gabriel Kimyagarov,Arturo Lorente,Authors: Elinor Hoover,Ajay Khorana,Anil Shivdasani,Gabriel Kimyagarov,Arturo Lorente,

Global corporate growth prospects are widely decoupled from economic growth prospects, with companies in some regions expected to grow at rates that significantly exceed economic growth forecasts. In this environment, the corporate finance challenge will be how to achieve growth while prudently managing heightened market and geopolitical risk. This decoupling will also heighten investors&rsquo; attention on capital deployment, and will in many cases require companies to shift their capital allocation priorities. In addition to capital deployment prioritization, this report focuses on how to use M&amp;A and restructurings to support equity growth premiums; how global capital markets can best be tapped to fuel growth; and how to manage risk in a complicated global marketplace while driving prudent growth. Authors: Elinor Hoover,Ajay Khorana,Anil Shivdasani,Gabriel Kimyagarov,Arturo Lorente,Authors: Elinor Hoover,Ajay Khorana,Anil Shivdasani,Gabriel Kimyagarov,Arturo Lorente,Authors: Elinor Hoover,Ajay Khorana,Anil Shivdasani,Gabriel Kimyagarov,Arturo Lorente,Authors: Authors: Elinor Hoover,Ajay Khorana,Anil Shivdasani,Gabriel Kimyagarov,Arturo Lorente,Authors: Elinor Hoover,Ajay Khorana,Anil Shivdasani,Gabriel Kimyagarov,Arturo Lorente,

Driving Corporate Growth in Divergent Markets

The corporate growth agenda remains at the heart of both corporate decision making and investor expectations. With a broad divergence in global growth prospects, a decoupling of rates and currencies, and a rapid decline in oil prices, it is critical to understand the implications of these changing dynamics and address how best to optimize growth.

Corporate Finance Priorities 2015

Against this backdrop, global equity valuations have steadily risen since the financial crisis, driven by the relatively uniform impact of extraordinary monetary policy. If monetary policy is supplemented with fiscal stimulus, at least in the U.S., it will likely have a more uneven impact across sectors. As a consequence, many companies will need to be more proactive in developing a well-articulated growth strategy to defend their valuation multiples. The evolving macroeconomic backdrop and changing regulatory landscape will create an opportunity for many firms to realign their strategic agenda and create long-term shareholder value. M&A and corporate restructurings will also need to be key strategic priorities. Firms must evaluate the merits of transformational transactions that can accelerate their growth, but must also remain disciplined given high valuations and M&A premiums. Cross-border M&A will remain attractive for many buyers seeking growth outside their home countries. Interestingly, M&A deals into countries valued at a premium relative to underlying fundamentals have outperformed deals into countries valued at a discount. Firms will need to manage regulatory and geopolitical concerns surrounding M&A in order to create long-term shareholder value. Spinoffs, if structured correctly, could also provide a path to value illumination in 2017, and a potentially lower corporate tax rate would facilitate divestitures in the U.S. Shareholder distributions continued to be a popular method of delivering value to investors in 2016, remaining close to global historical highs. However, the need to defend high embedded growth expectations in current valuations will require firms to invest going forward. Investors have rewarded companies that increased capital expenditures and R&D investment in the last two years while scaling back share repurchases. Moreover, higher interest rates might reduce the valuation benefits of further dividend increases. As companies shape their capital deployment strategy for 2017 and beyond, they must also reevaluate their hurdle rates, as the average gap between company hurdle rates and cost of capital has widened significantly. The need to protect financial flexibility and proactively manage risk is also paramount today. For many companies, there is a valuation advantage to having an investment grade credit rating, since it helps to weather downside risks and preserves flexibility to capitalize on strategic opportunities. In the U.S., a potential reduction in the tax benefits of debt financing under the new administration would put downward pressure on leverage over time, and tax law changes may also warrant a reevaluation of companies’ foreign cash holdings. Corporate executives will need to adjust their financial policies as uncertainty resolves around various proposals to change U.S. corporate tax policy. Activist investors will continue to influence the corporate finance agenda in 2017. Activists’ focus on stock price underperformance has sharpened in recent years and activism has become increasingly global. Shareholder activism has also become more mainstream with increased support from traditional asset managers. Companies should continuously assess their vulnerability through the eyes of an activist and engage early if targeted. Finally, technological innovation is disrupting many industries. We estimate that recent cycles of such disruption have impacted 10% of global companies (by market capitalization), and threaten to affect nearly another 50%. However, these disruptions will also create meaningful opportunities for many firms. Strategies ranging from proactive M&A, joint ventures and partnerships, and a portfolio-based venture capital approach must be considered to expand or defend market share and enhance shareholder value. Authors: Ajay Khorana,Anil Shivdasani,Gabriel Kimyagarov,Charles Hulac,Arturo Lorente,Authors: Ajay Khorana,Anil Shivdasani,Gabriel Kimyagarov,Charles Hulac,Arturo Lorente,Authors: Authors: Ajay Khorana,Anil Shivdasani,Gabriel Kimyagarov,Charles Hulac,Arturo Lorente,Authors: Ajay Khorana,Anil Shivdasani,Gabriel Kimyagarov,Charles Hulac,Arturo Lorente,

Against this backdrop, global equity valuations have steadily risen since the financial crisis, driven by the relatively uniform impact of extraordinary monetary policy. If monetary policy is supplemented with fiscal stimulus, at least in the U.S., it will likely have a more uneven impact across sectors. As a consequence, many companies will need to be more proactive in developing a well-articulated growth strategy to defend their valuation multiples. The evolving macroeconomic backdrop and changing regulatory landscape will create an opportunity for many firms to realign their strategic agenda and create long-term shareholder value. M&amp;A and corporate restructurings will also need to be key strategic priorities. Firms must evaluate the merits of transformational transactions that can accelerate their growth, but must also remain disciplined given high valuations and M&amp;A premiums. Cross-border M&amp;A will remain attractive for many buyers seeking growth outside their home countries. Interestingly, M&amp;A deals into countries valued at a premium relative to underlying fundamentals have outperformed deals into countries valued at a discount. Firms will need to manage regulatory and geopolitical concerns surrounding M&amp;A in order to create long-term shareholder value. Spinoffs, if structured correctly, could also provide a path to value illumination in 2017, and a potentially lower corporate tax rate would facilitate divestitures in the U.S. Shareholder distributions continued to be a popular method of delivering value to investors in 2016, remaining close to global historical highs. However, the need to defend high embedded growth expectations in current valuations will require firms to invest going forward. Investors have rewarded companies that increased capital expenditures and R&amp;D investment in the last two years while scaling back share repurchases. Moreover, higher interest rates might reduce the valuation benefits of further dividend increases. As companies shape their capital deployment strategy for 2017 and beyond, they must also reevaluate their hurdle rates, as the average gap between company hurdle rates and cost of capital has widened significantly. The need to protect financial flexibility and proactively manage risk is also paramount today. For many companies, there is a valuation advantage to having an investment grade credit rating, since it helps to weather downside risks and preserves flexibility to capitalize on strategic opportunities. In the U.S., a potential reduction in the tax benefits of debt financing under the new administration would put downward pressure on leverage over time, and tax law changes may also warrant a reevaluation of companies&rsquo; foreign cash holdings. Corporate executives will need to adjust their financial policies as uncertainty resolves around various proposals to change U.S. corporate tax policy. Activist investors will continue to influence the corporate finance agenda in 2017. Activists&rsquo; focus on stock price underperformance has sharpened in recent years and activism has become increasingly global. Shareholder activism has also become more mainstream with increased support from traditional asset managers. Companies should continuously assess their vulnerability through the eyes of an activist and engage early if targeted. Finally, technological innovation is disrupting many industries. We estimate that recent cycles of such disruption have impacted 10% of global companies (by market capitalization), and threaten to affect nearly another 50%. However, these disruptions will also create meaningful opportunities for many firms. Strategies ranging from proactive M&amp;A, joint ventures and partnerships, and a portfolio-based venture capital approach must be considered to expand or defend market share and enhance shareholder value. Authors: Ajay Khorana,Anil Shivdasani,Gabriel Kimyagarov,Charles Hulac,Arturo Lorente,Authors: Ajay Khorana,Anil Shivdasani,Gabriel Kimyagarov,Charles Hulac,Arturo Lorente,Authors: Authors: Ajay Khorana,Anil Shivdasani,Gabriel Kimyagarov,Charles Hulac,Arturo Lorente,Authors: Ajay Khorana,Anil Shivdasani,Gabriel Kimyagarov,Charles Hulac,Arturo Lorente,

Global corporates in 2017 face a risky world that has become more polarized, fragile, and unpredictable. The U.K. Brexit vote and the outcome of the U.S. presidential election have elevated the prospect of political uncertainty in other regions and raised many questions about their impact on the global economy in 2017. However, despite signs of an increasingly risky world, traditional measures of financial market volatility remain muted.

2017 Corporate Finance Priorities

Banking, Capital Markets & Advisory

Securities Services

Commercial Bank

Citi Global Perspectives & Solutions

Global Insights

Leadership

Private Bank

Treasury & Trade Solutions

Markets

Issuer Services

Citi Digital Assets

Citi Research

Wealth

News

SEC Filings

Perspectives

Europe, Middle East and Africa

North America

Latin America

Asia Pacific

Social Welfare Funds

Development Organizations

SOEs

Multilateral Development Bank

Central Banks

Central Governments

Ministry of Finance

Local Governments

Ministry of Foreign Affairs

Regional Development Bank

Fraud Prevention

FinTech

iBuyers

Mortgage

Origination

PropTech

Real Estate

Single-Family Rental

Data

GDPR

Privacy

Regulsyion

Auto

Demand

Food

Industrial

Metals

Russia

Shortage

Supply

Supply Chain

Tariff

Ukraine

Asteroids

Imagery

Logistics

Mining

Moon

Rockets

Satellites

Space

Space-Based Solar Power

Aware

Do No Harm

Impact

Investing

Monitoring

Risk

Sustainability

Taxonomies

Augmented Reality

Cryptocurrency

dApps

DeFi

Metaverse

Money

Virtual Reality

VR/AR

Auction

Disruption

Money Laundering

Online

Regulation

Virtual

Entrepreneur

Equal Opportunity

Equality

Global Growth

Innovation

Venture Capital

Women

Women Entrepreneurs

Education

Eliminating Poverty

Health

Multidimensional Index

Poverty

Standard of Living

Sustainability-Linked Bond

UN SDG

Inflation

Just in Case

Just in Time

Production

Transportation

Charity

Donations

Multiplier

Philanthropy

Service

Technology

Growth & Prosperity

Risk & Resilience

Sustainability & Society

Technology & Innovation

Health & Wellness

Citi Blog

Press Release

Regulatory

Product Marketing

Wealth Publications

ICG Insight Detail Template

As our premier thought leadership product, Citi Global Perspectives & Solutions (Citi GPS) is designed to help our clients navigate the global economy’s most demanding challenges, identify future themes and trends, and prosper in a fast-changing and interconnected world. 

Keep Exploring CITI GPS Content

Keep up to date with our latest insights.

Subscribe to Citi GPS

gpa-footer

gpa-menu

Citi, the leading global bank, serves more than 200 million customer accounts and does business in more than 160 countries and jurisdictions. Learn more today.

Global Investment Bank and Financial Services | Citi

Corporate Finance Priorities 2015

2020 Corporate Finance Priorities

2019 Corporate Finance Priorities

2016 Corporate Finance Priorities

Subscribe to Citi GPS

Sign up to receive the latest news from Citi.

About Us

Businesses

Our Impact

Investors

News

Careers, Contact Us, and Regulatory Disclosures