Strategic planning should continue to be a high priority for directors in 2018. In an increasingly competitive and evolving marketplace, coupled with a domestic economy growing at a low single-digit rate, stagnation is tantamount to failure, and singular reliance on organic growth is effectively a bet on poaching market share from rivals. In almost all industries, a company’s chances for success, survival and growth are dependent on accretive acquisitions. This is especially true in certain sectors, including health care and technology, as rapid consolidation and vertical integration in these industries continues. Boards will continue to struggle with the balance between achieving short-term results and/or otherwise using cash resources to satisfy calls by investors with an appetite for immediate gratification versus deploying capital to invest in longer-term growth opportunities that involve additional risk. Board discussions and decisions about capital deployment, risk tolerance and strategic plans are, and for the foreseeable future will continue to be, complicated by the unexpected continued low-interest-rate environment, which has enabled companies’ access to debt at historically low rates. Boards should expect to face mounting pressure to take advantage of the low-rate debt to finance share repurchases at the same time they consider potential acquisitions that could be financed with cheap debt.
Cross-border acquisition opportunities will be tempting to many companies, either as buyers or sellers. However, challenges will remain, since certain potential buyers, particularly Chinese entities, will likely continue to face enhanced regulatory and congressional scrutiny in the U.S. Enhanced scrutiny relating to political pressures can affect a buyer’s ability to execute a transaction and therefore adversely impact deal certainty, which is a critical factor for a board’s assessment of the sale of a company or its assets. Further, certain industries, including technology, must cope with different regulatory structures from jurisdiction to jurisdiction, and companies with strong intellectual property assets will need to continue to be mindful of, and responsive to, various countries’ less-than-rigorous intellectual property protections.
Perhaps as a result of unquantifiable risks relating to cross-border opportunities, we expect that 2018 will provide a continuum of strong M&A activity throughout certain domestic sectors of the U.S. economy, including infrastructure and construction. Of course, it remains to be seen whether “Buy American” will be mainly a slogan or an actual trend for boards and companies in the effort to achieve long-term and sustainable growth.
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