Game of unknowns for business in 2016

Professor Nuno Fernandes who heads the strategic finance program at Lausanne headquartered business school IMD shares its predictions for 2016.

Will there be a happy ending for the global economy this year?

As Game of Thrones fans know, “winter is coming” in the new episodes slated for 2016, and with it a season of uncertainty.

The outlook for the show’s Seven Kingdoms of Westeros is very similar to that of the current world economy and a lot of big questions remain as we ring in the New Year.

Will Europe get its act together and finally grow? Are activist investors going to continue to dominate? Will mergers and acquisitions lead to success or failure? Are unicorns on the road to extinction?

Here are my main predictions for 2016:

Activists on the rise

In 2015 hundreds of companies worldwide, like General Motors, Dow Chemical, Nestlé, Xerox or Mondelez, were subject to so-called activist investors.

This trend will continue in 2016. Shareholder activists often purchase minority shares of publicly listed companies, arguing that the companies are mismanaged, and propose ideas to enhance shareholder value. They later sell their shares at a higher price.

The firms that activists target tend to underperform relative to their industry. Due to their aggressive attitude toward management and hostile approaches to short-term profit making, they are perceived negatively as “corporate raiders,” “green mailers” or “asset strippers”.

Today, there are at least 10 activist funds managing over $10bn each. They use their firepower to actively influence the performance or governance of publicly-traded companies.

And their focuses are varied: core business, excessive cash holdings, need for optimization, mergers, capital structure reorganizations, spin-offs of parts of businesses and so on.

In addition to their own shareholdings, these funds typically receive the support of many institutional investors (mutual funds, pension funds, and asset managers) in their initiatives.

Activists will continue to have major influence in the coming year. This is welcome news for all other investors, as it helps unlock shareholder value.

Indeed, despite criticism, the empirical evidence is clear; share prices and operating performance at the targeted companies often improve after activist involvement.

“If every company were well managed, there would be no reason for activists,” said Warren Buffett. “The truth is, at some companies, the managers forget who they’re working for.”

Mergers and acquisitions (M&As)

2016 promises to be a big year for mergers and acquisitions (M&As) and the end of 2015 clearly showed some very prominent deals taking place, like ABInBev and SABmiller, and Pfizer and Allergan.

But this does not necessarily mean good news for investors. In practice, more than 60% of M&A transactions destroy value.

In addition, on some very visible deals, numerous anti-trust issues need to be overcome, and will involve significant divestitures in some markets.

There are however a few rules companies can follow to improve their odds of succeeding.

The synergies created by mergers have to be enough to justify the combination of two companies, and to create value. Execution is key, and vital implementation decisions must be made rapidly.

Post-merger integration should focus on the items that most justify the agreed transaction price and potential value creation for shareholders in the long run.

One of the most common mistakes in M&As is to dissociate the deal phase from the post-merger period, which explains why so many deals fail to create value.

For instance, business units or divisions should not be allowed to define the integration approach in isolation after the deal is concluded.

The post-merger process has to begin with rigorous pre-merger planning.

In 2016 we will see more emerging-market multinationals buying assets and companies in Europe. Chinese investors already have sizable stakes in carmaker Peugeot, the Weetabix breakfast cereal, and the Thames Water utility in the UK, for example.

In Portugal, Chinese investments account for nearly 40% of the money raised via privatizations over the past four years. And non-European sponsors are increasingly prominent on team shirts in Champions League football in Europe.

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