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.
The strength of the equity markets masks the largest valuation gap between the highest- and lowestvalued
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 longrun
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.