PwC's Deals Sector Leader John Potter and other partners discuss the deals outlook for 2022.
In an active M&A environment, value isn’t defined by the price of a transaction, but what you can unlock through a carefully considered value creation strategy. From optimizing portfolios to increasing resilience, companies can and should take aggressive action to improve their odds for deal success.
As 2022 unfolds, corporate and private dealmakers face critical questions with M&A decisions. How do you determine what a company is worth — not only on paper when the deal is signed, but what it can deliver in the years after that? How does that influence what you can and should pay now? What are the realistic paths to value creation — those taken with previous acquisitions, and those you don’t yet fully understand? Answering those questions isn’t easy. Here are five key considerations for your deal strategies in the year ahead.
Strategic portfolio reviews are vital for revealing potential acquisitions that can improve capabilities — where either the buyer uses its capabilities for the target’s benefit or the target brings capabilities the buyer needs — and the chances of positive returns. The alternative is often limited-fit deals with negative returns. Portfolio reviews also can identify possible carve-outs or spin-offs that could take advantage of the robust stock market. In some cases, you may be able to explore both divestiture avenues through a dual-track process.
As noted above, the capital available for deals — PE dry powder, SPACs, corporate cash and unused credit — is substantial, but the abundance of players means fierce competition. With valuations unlikely to decline anytime soon, it’s important to keep acquisition options open. Ask if lasting growth will come from bidding big within your sector or exploring adjacent sectors and building your knowledge — and investment — over time. Alliances and joint ventures may be attractive in some cases, with a smaller commitment yielding positive returns while preserving capital for other deals. On the sell side, if your company isn’t in distress, consider how proceeds from a divestiture can fund new growth areas. The temptation to park cash or divert it to shareholders can be strong, but long-term value is more likely through investments that aid transformation.
Increasing value for stakeholders requires going beyond the typical M&A due diligence, valuation formulas and integration metrics. Corporate buyers often pay high multiples for intellectual property they don’t fully understand, then must figure out how to unlock that value while still delivering on their core business. PE funds also are challenged by high valuations for tech, healthcare and other types of businesses, which has moved many acquirers to pay more attention to how assets perform right after purchase and where future value creation opportunities lie. Whether you’re a corporate or private investor, you should honestly assess how well your organization addresses factors such as purpose, culture and digital acumen that increasingly affect how companies come together in a deal and how well they thrive afterward.
After escalating in 2021, government scrutiny of big business could be even stronger in 2022 leading up to November’s US midterm elections, which could bring a shift in political power. And it’s not just Big Tech under the antitrust microscope. The US Justice Department has challenged deals by insurance companies, airlines and book publishers on business competition grounds, while regulatory reviews have delayed banking and pharma acquisitions. Those decisions came as recent announcements by the Federal Trade Commission signaled more rigorous M&A reviews. Add the potential for tax changes and increased scrutiny of inbound US investments, and you may need to reassess your M&A strategy to incorporate more agility in deal decisions and execution.
Ongoing supply chain issues require more resilience and could affect valuations in deals — or even some deal decisions as larger companies consider taking more control of supply chains. That could mean bringing some transportation and logistics in-house or acquiring production facilities closer to customers. But while consumer, manufacturing, tech and other types of companies wrestle with supply chain questions, you should be careful about overcorrecting; plan for the next three to five years, not just six to 12 months. Also keep in mind that resilience extends beyond parts and goods. The increased competition for talent, need to upskill or reskill employees, potential wage increases and challenges with retention all are playing a bigger role in workforce diligence, while ensuring reliable cybersecurity and privacy protections will require more investment by both sellers and buyers.
Deal opportunities in 2022 abound, but the bar for achieving positive results has rarely been higher. Recent research found that the shareholder returns of more than half of acquiring companies underperformed their industry benchmark in the two years following completion of their last deal. To deliver value, deals should be deliberate acts that are part of your corporate strategy, not opportunistic grabs made possible simply by having a bunch of cash.
What does that really mean? To gain a competitive edge in 2022, don’t assume value creation will naturally happen as a deal proceeds. More than half of buyers who told us their latest acquisition created significant value said they prioritized value creation from the start. That requires going beyond the topline costs and obvious synergies and focusing on the extra value creation levers in deals.
As you explore your next deal, consider all elements of a comprehensive value creation plan — not a checklist, but a blueprint that includes strategic repositioning, revenue growth opportunities and changes to business and operating models, as well as a closer look at tax, the balance sheet and working capital. Investing in that effort well ahead of signing a deal can turn what would have been an underperforming deal into a transformative one.