U.S. CEOs are navigating the complexities of AI adoption, M&A, and strategic partnerships, driven by high expectations for 2024. Cody Crook, managing director at Hunt Scanlon Ventures, weighs in on the expected M&A frenzy to follow.
According to new survey data from EY, CEOs in the United States are riding a wave of optimism when it comes to revenue, profits, transactions, and the potential of generative AI. Survey data published this past month reveals that business leaders are confidently steering their organizations towards profitability, even as economic concerns loom.
While AI investments might take time to fully materialize, business leaders are convinced of the need to embark on the journey now. CEOs understand that artificial intelligence can be the linchpin of a competitive advantage in the rapidly evolving markets of the future.
Starting the AI Journey
But the path towards implementing AI is not without its complexities. Of CEOs surveyed, 62% agree their organizations must act now on implementing AI to avoid giving competitors a strategic advantage. However, 61% say uncertainty around the technology makes it challenging to develop and implement a functional strategy.
There’s a lot to consider when it comes to implementing AI – from the accelerated pace of development to the considerable costs, ethical considerations, and potential regulatory scrutiny.
These challenges complicate the math on developing a reasonable hedged funding strategy for AI implementation. Among the CEOs surveyed, 37% intend to reallocate capital from other investment budgets, 34% plan to raise new capital, and 26% will specifically reallocate capital from technology budgets.
Renewed M&A Frenzy
No matter where the funding is coming from, CEOs understand that it is essential to act quickly on AI implementation. But they know that rushing this process would be misguided. They see significant strategic questions that need to be heavily considered. These include whether to use open-source or proprietary large language models (LLMs) for their AI systems, and whether to build, buy or partner on their AI systems. Getting these questions right can define a company’s success in the era of AI driven business transformation.
The EY survey additionally highlights CEOs’ heightened interest in transactions. With the swift adoption of transformative AI and other technologies, CEOs exhibit a strong appetite for M&A.
The promise of increased profits in the age of AI has CEOs looking to divest from former ventures, and to form new joint ventures or strategic alliances with third parties. There has been rapid consolidation in the human capital sector, which is just one example to look at, over the past few years and after recent market shifts, it looks like the frenzy is on the return.
Despite the fervor around the implementation of AI and the M&A frenzy it is beginning to drive, geopolitical uncertainty remains a potential roadblock to profit expectations. CEOs identify increasing investment costs and slower economic growth in key markets as the top two barriers to maximizing revenue growth and profitability in 2024.
But make no mistake: there is optimism even here. CEOs are devising multilayered investment strategies that would counter these concerns. Research and development, acquisitions, corporate venture capital, and divestments are among the areas expected to witness higher investment as next year unfolds.
As the business landscape continues to evolve, U.S. CEOs are navigating the complexities and seizing opportunities presented by GenAI, mergers and acquisitions, and strategic partnerships, with an unwavering commitment to driving growth and innovation. The future promises transformation, and CEOs are taking bold steps to be at the forefront of this change.
Following are excerpts from a recent discussion with Cody Crook, managing director of Hunt Scanlon Ventures. Cody unpacks how expected higher profitability and increased AI applications will likely contribute to increased M&A activity in the coming year.
Cody, what was your biggest takeaway from the EY data?
I was excited to see the data on CEO’s expectations for the coming year. EY reported that 69% of U.S. chief executives expect higher profitability in 2024. We’ve been projecting this rebound in ExitUp for months. In July, we published a ‘Market Insight’ article examining Morgan Stanley data that projected an intense rebound in earnings in the next two years. The figures showed a sharp rebound with earnings-per-share growing 23% in 2024 and 10% in 2025. Seeing EY’s survey data feels like a validation of what our contention has been for months now. We should be mindful that any upswing in the market of the magnitude that Morgan Stanley and others have predicted will have a major impact on hiring, recruiting, and talent retention as early as 2024.
What will the expected M&A frenzy look like?
In the U.S., in particular, M&A activity is set to soar. 52% of U.S. CEOs are planning M&A activity over the next year, according to EY. This is, of course, being driven by CEOs’ improved outlook on their companies’ financial prospects, and by the necessity of finding strategic partners to help implement AI. But CEOs aren’t just looking at traditional M&A in this pursuit. A whopping 93% of CEOs reported that they’ll be pursuing either traditional M&A, a joint venture, or a divestment/spinoff/IPO in the next year. I thought this statistic was the most revealing in EY’s survey data set.
Can you speak of the importance of getting AI implementation right?
I think the most important thing is to get AI implementation right on the first shot, because you might not get a second chance. There are a lot of important decisions to be made when choosing a strategy for AI implementation. Once these decisions are made there will be a LOT of sunk cost involved should a company need to change course in the middle of implementation.
How can firms optimize their chances of getting it right on the first go?
Operators need to act decisively, but they shouldn’t rush to make these decisions. Consider all available data and don’t skimp on up-front costs. The expense of bringing in a consultant to ensure that you’re going about this the right way may seem lavish. But the price of changing course in the middle of implementation will make those costs seem irrelevant.
Cody Crook is managing director and head of investment strategy at Hunt Scanlon Ventures - an M&A advisory firm that specializes in the human capital space. Cody is responsible for co-managing the firm's investment portfolio, which includes executive search, talent acquisition, private equity, and investment firms. Leading the investment team, he spearheads all fund transactions and maintains portfolio developments. He is also responsible for sourcing, managing and monitoring investments and working with external portfolio managers, analysts and investors on active and prospective transactions. Connect with Cody.