Deal value planning needs a reality check – now

By Hein Marais, EMEA Value Creation in Deals Leader, PwC UK

At a time of major industry convergence, digital disruption and dramatically shifting business models, deal value creation has never been more important. But as we know, creating deal value in M&A is more challenging than ever.

Acquisition prices are rising and future-proofing targets is costlier than ever, while a combination of new regulations and changing public perceptions has restricted opportunities arising from tax – something that was once at the heart of deal value optimisation.

The bar is getting higher and deals are becoming more expensive – in short, the M&A landscape is transforming. This much we already know.

But is there something else the industry is missing when it comes to value creation? According to our new survey of over 600 global executives and deals leaders on value creation – there could well be.

Reality vs. perception in dealmaking

It looks increasingly as though there’s a disparity between perception and reality at the acquisition stage.

Consider this – research by Cass Business School* found the Total Shareholder Return (TSR) of more than half of acquiring companies underperformed their industry benchmark in the two years following completion of their last deal.

And yet, almost two-thirds of respondents in our survey said they believed their last acquisition created “moderate to significant” value. Why the mismatch?

Well, a key element of this disparity can be put down to the fact that what’s being measured isn’t matching up with actual value being created. As we all know, some deals are negotiated initially by senior executives, with the due diligence team coming in later for the detailed analysis stage. But in most cases this analysis is only intended to justify the already agreed purchase price, rather than the actual potential for long-term value creation.

Value planning, it seems, needs a reality check.

What is traditional M&A and how do we change the playbook?

This conventional method of measuring value at the acquisition stage speaks to the broader traditional approach to value creation – something that needs to change wholesale.

But what do we mean by the “traditional approach”? In short, going for big wins, taking an opportunistic view, or responding to what industry competitors are doing. In buying terms, it means looking at the top line, synergies and not much else.

You may recognise this approach yourself – you might have even created value with your M&A in the past with such a playbook. But today’s M&A landscape is forcing change.

Crucially, value planning is no longer just a question of what – it’s also a matter of when and how.

"You need to be T-minus 30 days ready, which means having the value creation plan validated and ready to be implemented ahead of deal signing."

Hein Marais, EMEA Value Creation in Deals Leader, PwC UK

Buyers need to find those extra value creation levers to gain a competitive edge – more detailed focus on strategic repositioning, revenue growth opportunities, changes to the business model and operating model, for example, or putting tax, the balance sheet and working capital under the microscope. This could prove the difference between a mediocre deal and a transformative one.

And the only way a business can access these levers is by working harder in the lead-up to the transaction. Essentially, that means assessing, validating and planning for everything from not just day one, but even earlier than that.

Buyers, in essence, need to be “T-minus-30 days ready” which means having the value creation plan validated and ready to be implemented ahead of deal signing. Traditional 100 day thinking is no longer good enough.

And this isn’t just speculation – our Creating value beyond the deal M&A report underscores this; only a third of deal executives say that value creation planning was a key focus at Day One for their last deal, while two thirds agree that value creation should have been a priority on Day One in their latest deal - a seismic shift in the importance and timing of value creation plans. The days of opportunistic, spur-of-the-moment deals may be a thing of the past.

Traditional value planning needs a serious reality check – the conventional formula is no longer fit for purpose in today’s digitally disrupted landscape.

Our research sheds additional light on not just the reasons that traditional value planning is no longer good enough for deal value creation – it also demonstrates the ways in which it can change to maximise return.

*To help our clients unlock long-term value from the deals they are doing, we surveyed 600 senior corporate executives from a range of industries and geographies and asked about their experiences with value creation through M&A. All participants in our survey had made at least one significant acquisition and one significant divestment in the last 36 months.

In addition, a large-scale global study was conducted on the performance of corporates around the world, following an acquisition and divestment.

The survey and research were conducted by Mergermarket and Cass Business School, respectively, on behalf of PwC.

In this report, we outline the key findings, discuss their implications and share our insights on how to further advance and refine the way you approach value creation within your own organisation.

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PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details.

This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

Contact us

Malcolm Lloyd

Malcolm Lloyd

Global, EMEA and Spain Deals Leader, PwC Spain

Tel: +34 629 11 83 08

Hein Marais

Hein Marais

Head of Deals Consulting, PwC United Kingdom

Tel: +44 (0)7740 064729

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