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M&AS BIGGEST DEALBREAKERS FOR 2022 – COVID-19, CLIMATE CHANGE AND ESG

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Businessman holding an hour glass, signifies the importance of being on time

By Merlin Piscitelli, Chief Revenue Officer, EMEA, Datasite

 

As 2021 draws to a close, dealmakers are focusing on the forecast for 2022, hoping to lessen any developing risks which may impact M&A activity and reduce the pace of deals over the next 12 months. Thanks to the pandemic it’ s clear that any organisation eyeing an M&A deal must look ahead, explore and mitigate external factors, or they risk the deal collapsing.

Factoring in pandemic recovery, ESG considerations, climate risks, and even continuing Brexit challenges the corporate agenda for 2022 looks complex. In fact, according to Datasite’s recent survey, UK dealmakers believe the largest threats to completing deals in the next 12 months will be issues stemming from the ongoing pandemic, ESG – particularly climate change – and Brexit.

 

Navigating COVID-19

The pandemic shook up all the rules in the M&A sector, sparking unparalleled economic disturbance, which altered the way business is done and raised dealmaking risk. Even with this volatility across markets and uncertainty within boardrooms thanks to ongoing lockdowns, M&A came out stronger. According to Datasite’s latest ‘Deal Drivers’ report for Q3, UK & Ireland deal value rose 159% year-on-year to €298bn, with deal volume up 70% to 1,653 transactions.

Despite M&A demonstrating its strength to rebound, according to recent findings, the pandemic continues to be at forefront of dealmakers concerns for the year ahead too, with 41% of UK dealmakers citing COVID-19 to be the biggest M&A dealbreaker in the next 12 months.

Merlin Piscitelli, Chief Revenue Officer, EMEA, Datasite

Merlin Piscitelli

Considering its unprecedented nature, it’s not surprising that dealmakers expect to face more COVID-19 related challenges next year. Dealmakers expect the pandemic to impact M&A strategy moving forwards and are equipped to remain agile. With the pandemic, came rapid digitization within business, and this acceleration looks set to continue in 2022 as dealmakers work to reduce risks and enhance collaboration.

While M&A professionals certainly can’t control the virus or the resulting economic impacts, they can ease the due diligence process by utilising digital tools to manage the entire lifecycle of an M&A deal – from Virtual Data Rooms (VDRs), advanced machine learning capabilities and artificial intelligence (AI) to maintain efficiency and reduce the overall stress and pressure felt in the industry.

Dealmakers will increasingly be looking to technology to not only push forward deals but also, manage a hybrid deal team. Unfortunately, those who don’t accept this new way of working will find themselves losing out on major deals to more agile and tech-savvy competitors.

 

Prioritising the ‘E’ in ESG

Following COP26, there is even greater pressure on the finance industry to ensure best practices that

address climate change and promote sustainability. But is the M&A world concerned? Will there be real action or has the event amounted to nothing more than greenwashing?

The data shows dealmakers are extremely worried, with 40% of dealmakers expecting climate-change concerns to be the greatest dealbreaker next year. With nearly 70% of UK dealmakers stating climate change is high or very high up on their company’s agenda, it’s clear that M&A professionals are very much on board with the finance industry making more than just promises. In fact, 42% of UK dealmakers expected to see a unified commitment come from COP26.

What’s more, a worrying 64% of all UK and US dealmakers foresee more deals to fall apart because of climate-change related due diligence over the next two years. The onus is on today’s dealmakers to make new considerations for this in the due-diligence process – whether that’s determining a deal’s susceptibility to climate change, analysing its longer-term financial impact or mitigating against any negative impacts to protect returns in the face of the disruptive effects of climate change.

The focus is very much on the ‘E’ in environmental, social and governance (ESG) as M&A becomes wary that shifting consumer and investor sentiments will lead to a disinvestment in companies with poor ESG outcomes. Professionals in the M&A industry want to make sure that companies are environmentally minded, with 70% stating ESG is now a priority for them. The survey also found that 76% of UK dealmakers believe the UK and FCA must be more ambitious when integrating ESG factors into the financial markets.

Taking these sentiments into account, 2022 looks set to see climate change-related financial risks and ESG issues dictate how investors assess M&A targets and deploy capital. Combined with political and regulatory pressures, dealmakers can see the urgent need to approach investment in a more sustainable way. Encouragingly, over half (55%) said their companies have explored a new M&A strategy with this in mind, while 27% have said their businesses have implemented a new strategy. The findings indicate the direct impact climate change is having on the financial markets. Unfortunately, those not taking sustainability issues seriously will see more failures with their deals from next year.

In conclusion, if M&A activity is to remain prosperous in 2022, both buyers and sellers must educate themselves on the effects of the pandemic and climate change on M&A markets. After all, these factors will likely result in long-term issues. M&A dealmakers must adapt and future-proof or risk their deals falling through next year.

 

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How can businesses boost employee experience for finance professionals?

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By Martin Schirmer, President, Enterprise Service Management, IFS

Over the course of the last year, The Great Resignation has seriously impacted organisations across the globe. Staff are quitting in huge numbers, leaving companies unprepared and struggling to fulfil their workloads. In fact, mass departures are happening at all levels of the labour market, as employees attempt to adapt to the hybrid working model and growing socio-economic uncertainty.

In light of this, optimising the employee experience (EX) to attract and retain talent has become a top priority for employers. Organisations have come to understand the necessity of taking immediate steps to drive employee engagement and reshape workplace culture.

The financial services (FS) industry is no exception to this trend. From increasing employee burnout to growing career dissatisfaction, the pandemic has exacerbated the need for transformation across finance teams. This is exemplified by recent data from Spendesk, which found that approximately 40% of finance professionals are willing to leave their roles or already have concrete plans to do so.

Organisations looking to get ahead of the competition must put in extra efforts to retain their existing workforce. The fact is that employee expectations and requirements have irreversibly changed, with more workforces becoming increasingly distributed. Today’s hyper-connected workforce values flexibility and simplicity, and it is organisations which offer these experiences that will succeed in the long term.

As part of this process, finance companies must look towards the power of technology to create seamless user experiences across devices. From automating workflows to improving overall efficiencies, Enterprise Service Management (ESM) can help organisations to boost user satisfaction and go that extra mile for their employees.

How poor EXs are driving finance teams to quit

With over 40% of employees spending a significant proportion of their time carrying out mundane, manual tasks, it is not surprising that poor EXs are having a detrimental impact on job satisfaction. Finance teams in particular have been slower to digitise core processes, leading to a heavy reliance on manual tasks. This not only increases the amount of time spent on each task, but also impacts the engagement levels of finance professionals who cannot focus on more strategic aspects of their roles.

As a result of the pandemic, flexibility has also moved to the forefront of finance teams’ desires. Given the fast-paced nature of this industry, the conversation surrounding work-life balance has increased rapidly. Failure to offer flexible working policies, coupled with a lack of technology to facilitate this flexibility, has led to poor EXs across the board.

Most notably, the overarching move to omnichannel, digital-first approaches has dramatically reset both customer and employee needs. Finance is the third-slowest running corporate function behind legal and IT. Operating in a competitive environment, 73% of finance operations are facing pressures to speed up, improve efficiency, and prioritise automation.

Mitigating the problem using technology

ESM, an offshoot of IT Service management (ITSM), is the cornerstone of smart digital transformation for organisations. It can help finance teams to streamline and automate routine processes, such as monitoring the status of service requests, approving expenses, sending invoices, and tracking payments. In turn, this will free up employees’ time, reducing the burden of manual tasks and enabling them to focus on the more strategic tasks.

Another advantage ESM can offer finance teams is the ability to adapt to each department’s minimum requirements for data privacy. Accounting, for example, needs additional layers of compliance built into the system.

ESM can also facilitate cross-departmental collaboration, helping finance professionals to communicate with the wider business and perform tasks more effectively.  Organisations can use ESM to incorporate all internal services into a single platform, offering employees a well-rounded view of the business and promoting a sense of community across all levels of an organisation. This will boost productivity, whilst enhancing visibility and control.

Ultimately, the current job landscape has brought with it a new set of challenges. Organisations in the FS industry looking to navigate the storm and retain top talent must refocus their efforts on bolstering the EX. Embracing a new era of technological innovation that empowers employees and boosts engagement is a critical step in this process.

 

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CBDCs: the key to transform cross-border payments

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Dr. Ruth Wandhöfer, Board Director at RTGS.global

 

If you work in finance, you’ll have been hearing a lot about central bank digital currencies (CBDCs) and the moves different markets are making towards using, regulating and evaluating the viability of moving to an economy based on digital currency.

We are already seeing progress in the research, piloting and introduction of CBDCs into the financial system. The Banque de France for example, recently launched its second phase of CBDC experiments in line with the “triple digital revolution” unfolding in the financial sector. The infrastructures of financial markets and fintechs, however, are not prepared to accommodate their security, stability, and viability.

This could be an issue in the not too distant future. Each year, global corporates move nearly $23.5 trillion between countries, equivalent to about 25% of global GDP. This requires them to use wholesale cross-border payment processes, which remain suboptimal from a cost, speed, and transparency perspective. In fact, the G20 cross-border payments programme considers improving access to domestic payment systems that settle in central bank money, as one of the key components in facilitating increased speed and reducing the costs of cross-border payments.

The current state of cross-border payments

International transactions based on fiat are currently slow, expensive, and highly risky due to today’s disconnected financial infrastructure, messaging, and liquidity. Wholesale cross-border payment settlement can take 48 hours or longer, which is not practical in today’s digital world. Even if not every market moves to CBDCs, in an increasingly digital era, cross-border settlements between central banks will unavoidably involve dealing with CBDCs. So, not only will we have different currencies, we’ll have different technical forms of currency being exchanged – digital and fiat – as markets adopt CBDCs at different rates, adding another layer of complexity to cross-border settlements.

While there is much anticipation about the opportunities CBDCs can bring, the adoption of this technology will only be widespread if payment and settlement capabilities are overhauled to allow for new innovations in currencies.  This need for transformation represents an opportunity to redesign existing infrastructure to support cross-border CBDC transactions.

The current cross-border payments system involves correspondent banks in different jurisdictions using commercial bank money. Uncommitted credit lines used in cross-border transactions are a potential risk for any bank that relies on credit provided by a foreign correspondent bank. Interestingly, there is no single global payment and settlement system, only a complicated network of interbank relationships operating on mutual trust. While trust has allowed financial systems to function smoothly, when it begins to fail, as it did during the 2008 financial crisis, the result can be catastrophic.

Following the crisis, the Bank for International Settlements (BIS) implemented the Basel III agreement, which required banks to maintain additional capital against correspondent banking account exposures. These risk-weighted assets impose a costly capital charge on positions held by banks at other banks under correspondent arrangements. While this framework helps combat risk, it neglects to address the inherent problems in traditional correspondent banking that contribute to these risks.

Making the case for CBDCs

CBDCs can offer an improvement in settlement risks and are certainly thought to have potential benefits by the BIS. If implemented correctly, wholesale CBDCs can indeed accelerate interbank transactions while eliminating settlement risk. They can also encourage a more efficient and straightforward method of executing cross-border payments by reducing the number of intermediaries.

It is likely the evolution towards CBDCs will initially see the financial market supplement rather than replace existing payment instruments with new types of digital currency. CBDCs will coexist with current forms of money in a wholesale context, and their payment rails will also work alongside the existing payment systems. In simple terms, CBDCs will need to be linked to the broader capital markets ecosystem and applications such as securities settlement, funding, and liquidity.

If built with an innovation-first mindset, the future of banking infrastructure should provide full interoperability and convertibility between fiat, CBDCs, and any other type of digital money used in wholesale payments.

The future of CBDCs

To unlock the full potential of CBDCs, a ‘corridor network’ will need to be formed. This involves combining multiple wholesale CDBCs into a single, interoperable network under common governance agreed upon by all central banks involved. The legal framework of this platform would then allow for payment versus payment (PvP) or, where applicable, delivery versus payment settlement.

Practical wholesale CBDCs appear to be on the horizon, either as a supplement to existing financial systems or as part of a transition to a digital, cashless world. Looking ahead, central banks would benefit from collaborating with fintechs that provide innovative cloud native technology to enable seamless wholesale cross-border payments without interfering with the flow of funds. If wholesale CBDCs are to become a reality, fintechs must be prepared to accommodate them.

 

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