Why value creation will be critical for deals to succeed in 2022

February 10, 2022

Colin Wittmer
Deals Leader, PwC US

The record levels of deal activity we saw in 2021 are likely to continue this year as companies explore M&A, divestitures, special purpose acquisition companies (SPACs) and other transactions. In PwC’s January Pulse Survey, 88% of executives across the C-suite said pursuing corporate M&A, joint ventures and alliances is important for their company’s growth in 2022. Nearly half said it was very important.

However, if these corporate or private equity deals are to be successful, they need to go beyond traditional metrics such as topline growth, cost leverage and integration synergy. That was the focus of our recent Deals 2022 Outlook webcast, which covered three key areas that are increasingly important in deals: value creation; environmental, social and governance (ESG) goals; and digital transformation.

Value creation

Value isn’t defined by the price of a transaction. Instead, it hinges on what a business can achieve with a value creation strategy that optimizes revenue growth opportunities, increases resilience and enhances the workforce. Dealmakers should consider these critical areas.

  • Strategic portfolio reviews can be instrumental in doing the right deals. They can identify potential acquisitions likely to improve capabilities as well as opportunities to divest noncore assets — scale up or slim down. Lasting growth may come from bidding big within your sector or from exploring adjacent sectors and building your knowledge — and investment — over time.
  • Operational aspects are at the forefront in deal valuation. Supply chain resilience, the increased competition for talent and the need to upskill and enhance benefits all were cited as top risks to growth this year in the latest Pulse Survey.
  • Overlooked elements of value such as purpose, culture and digital acumen need to be understood and addressed, as they affect how companies come together in a deal and how well they thrive afterward.

ESG goals

ESG is important enough to be part of a company’s overall business strategy and should fit in comfortably within its strategic plan. In the Pulse Survey, 88% of respondents said ESG is very important or somewhat important to their company’s ability to grow this year. The same percent said they’re investing in ESG initiatives in 2022.

It’s clear private equity firms and corporates are taking ESG very seriously. In fact, a growing number of companies are responding to stakeholder pressure and have begun looking at deals through an ESG lens. That makes it critical to take the following actions:

  • Embed ESG into your company’s dealmaking framework.
  • Never forget your company’s ESG impact on the outside world — and on stakeholder concerns and regulator challenges.
  • Consider ESG’s value creation potential, including in the form of value preservation: The financial and brand consequences of ignoring ESG are increasingly tangible.
  • Increase your diversity, equity and inclusion (DE&I) efforts — from the mailroom to the boardroom — not just because it’s the right thing to do but because it enhances culture, innovation, customer and employee experience, and ultimately enterprise value.
  • Focus on talent and turnover and how a specific deal could affect those areas.
  • Don’t greenwash your ESG approach. Stakeholders won’t accept “all talk, no action.”

Digital transformation

The pandemic has accelerated digital transformation, and companies across sectors are trying to differentiate themselves through their use of emerging technologies. Technology is a factor in a growing number of deals in every sector, and the share of tech acquisitions by non-tech buyers continues to rise.

In the Pulse Survey, 60% of executives said capitalizing on digital transformation initiatives is very important to their company’s ability to grow in 2022, while 59% said their company will invest significantly in digital transformation initiatives. Some examples of sectors that are making tech acquisitions:

  • Consumer companies continue to build their data analytics capacity to better predict customers’ behaviors.
  • Fintech investment is likely to grow as retailers try to make shopping and payments more convenient and as large financial institutions acquire digital banking and payments businesses. Some finance companies are even using M&A to gain a foothold in cryptocurrency.
  • The dynamic is similar in healthcare, where payers and providers talked for years about how to deliver care more efficiently and quickly. The pandemic has accelerated tech adoption in healthcare and will likely spur more acquisitions in the years ahead.
  • Companies in multiple industries are using tech in their efforts to incorporate and monetize non-fungible tokens (NFTs). As NFTs and other digital assets gain broader acceptance, there could be an acceleration in crypto-related IPOs and acquisitions.

The bottom line

Businesses should approach deal and investment opportunities in 2022 with the following points in mind.

  • Strong core: Consider technologies that are likely to enhance your core first, before exploring areas where expansion into adjacent sectors would be possible and profitable.
  • Tech cycles: Investing now may be essential to ride the next technological wave.
  • Consider scale: A large bet on transformation shouldn’t jeopardize the future of your core business.
  • Buy versus build: The higher price for an A-plus target might generate solid returns with the right execution. However, money saved by acquiring a B-minus asset could be used to develop it into an A-plus asset in the future.

Contact us

Colin Wittmer

Colin Wittmer

Deals Leader, PwC US

John D. Potter

John D. Potter

Deals Clients & Markets Leader, PwC US

Follow us