CEOs ‘are still bold on growth,’ EY strategist says

EY Americas Strategy and Transactions Vice Chair Mitch Berlin joins Yahoo Finance Live to discuss CEO outlook in the current economic environment and other findings from a new EY report

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RACHELLE AKUFFO: Well, two of the largest US supermarkets are merging. We talked about this before. Kroger has agreed to buy Albertsons for $24.6 billion. Now this comes as a majority of executives find themselves altering their investment plans. As we take a look, 93% of CEOs say they've made alterations to investment plans amid geopolitical turmoil. And that's according to a new survey from EY. But over half still say they expect to pursue an acquisition in the next year.

Mitch Perlin, EY America's strategy and transactions vice chair, joins us now. Now you talked about this being that everywhere, all at once, similar to the movie. A lot of things that some of these CEOs are having to contend with. How is this affecting the landscape? What were the biggest findings in your study?

MITCH BERLIN: Well, I think not surprising, you know. Inflation is top of mind for all the CEOs that we spoke to. We interviewed over 760 CEOs around the world, and 65% of them expect their earnings to be impacted by inflation. And that's really due to the input prices, which include labor, raw materials, energy, and freight. There's only so much of that cost they can pass back on to the end consumer.

So the CEOs that I work with on a daily basis actually are looking at ways to take out costs so they can still meet their bottom line in other ways so they can reimagine their business to be a leaner, more efficient version of what they are today. So I would expect that over the next six to nine months, you're going to see a lot of restructuring and reorganizations in corporate America.

SEANA SMITH: Hey, Mitch. Rachelle led the intro there with the news today from Kroger and Albertson's. And this survey said 52% of the CEOs are still pursuing M&A. Any idea just in terms of why and I guess why they would be a little bit more optimistic than I think we would have initially thought at this point?

MITCH BERLIN: Yeah, well, the interesting thing, Seana, is that when we look at the difference between the US results and the rest of the world results, the US CEOs are more bold. They know that they need to transact to transform. And they're still very bold on what's going on. They're bold on growth. And they know that in order to stay ahead of the competition, the fastest way to get there is through M&A.

RACHELLE AKUFFO: And you said it's more about prudent deal-making. What are some of the conversations that they're having when trying to determine what should be an acquisition versus, say, a joint venture?

MITCH BERLIN: Well, I think they're really concerned around not overpaying. The multiples last year were off the charts. And so what we're seeing is, particularly with corporates, that they're doing much more diligence and making sure they're doing the right deal now for the right price. We haven't seen a lot of private equity in the market over the last couple of months. We expect that they will come back.

As the cost of capital continues to increase, we would expect that the corporates would retreat a little bit because the deals become more expensive for them. But the private equities are still sitting on a lot of dry powder. They'll reenter the market and take advantage of the lower valuations. And that's important for them because I think there was a lot of overpayment in the last year.

SEANA SMITH: Mitch, one big trend that we've been following very closely, obviously, is this tight labor market. It's been a huge challenge for companies to lure in some of that top talent. Did this come up in your conversations with CEOs? And I guess, what are they doing in order to attract talent to their firms?

MITCH BERLIN: Yeah, input costs was a big issue for our CEOs in terms of inflation. You know, and so talent is one of the major input costs. The survey really did not touch a lot on the different things that they're doing to attract talent. But we do know that clearly, it's been a significant impact. I mean, unemployment is at its lowest rate in, what, 50 years now at 3%. So it is a tight labor market out there.

RACHELLE AKUFFO: And Mitch, obviously, we're in a very different place than we were two years ago when the pandemic was first kicking in. In terms of how CEOs are now thinking of the pandemic and the pandemic related issues that they're focusing on when they're trying to come up with their strategies, what were their priorities?

MITCH BERLIN: Well, it's interesting because the pandemic is still the number one concern. I was listening to your earlier segment around the CDC's sort of concern around the rise in COVID. But when the CEOs are talking about the pandemic, they're really using it as a proxy for broader issues.

So it's not just the health concerns that we had two years ago. It's the-- it's inflation. It's the increased input costs, labor and such. It is supply chain issues. It's factory shutdowns in China. Those are all top of mind for our CEO. So the pandemic was the number one concern for them, but following behind that, like, 8 points behind that, though, so a distant second, was regulatory concerns, followed by geopolitical concerns and then also climate change.

RACHELLE AKUFFO: Certainly lots for them to contend with. A big thank you, Mitch Berlin, for joining us from EY. Thanks so much.

MITCH BERLIN: Thank you.