A checklist for M&A deals in a downturn

During any period of uncertainty, companies, private equity firms and other potential acquirers should weigh adjustments to investment strategies. Companies that can leverage capital and make deals early in a downturn may likely see better returns. But for that to be realized, those companies have to be prepared. In response to near-term economic challenges, global CEOs say they are taking actions to spur revenue growth and cut costs, without delaying strategic M&A initiatives. As these economic concerns continue, here are some of the factors dealmakers should consider while crafting their M&A strategy.

Prepare so you can act with confidence

Learn from past downturns: Executives are concerned about inflation and interest rates more than a potential financial crisis or global pandemic. PwC analyzed the recession from March to November 2001, which may be more similar to the current environment than the 2008 Great Recession or the COVID-triggered 2020 recession. We found the median shareholder returns for companies that made acquisitions outpaced their respective industries in the following months, rising as high as 7% a year after the transaction was announced. Being proactive can pay dividends.

Understand why deals will still get done: Most business leaders know they can’t cut their way to growth. Deals are key to business resurgence and economic expansion. And there’s plenty of cash in the system to fund M&A activity. Private equity’s M&A activity has cooled recently as interest rates rose. We expect more creative approaches to deploy capital (minority investments, all-equity deals, private placement of debt) and a broader recovery in activity either as inflation is tamed or as asset valuations are sufficiently depressed.

Adjust metrics and benchmarks: The metrics that drive the share prices of public companies may not change during a downturn, but some could take on more weight than others. Companies should adjust their analytic tools to monitor and prioritize key metrics for potential downturn scenarios.

Enable flexibility in the deal funnel: Adjusting metrics and benchmarks help companies reassess the corporate development deal funnel and determine which prospects are clear priorities in a downturn and which assets may come to market in a tighter economy. Recent history is less relevant than scenario analysis, which will be critical for target assessment.

Keep communication front of mind: Proactive dialogue between management and corporate development teams with the boards of directors and investment committees can build confidence that the company understands the competitive landscape and is prepared for a range of scenarios. That can be key to enabling prompt responses to M&A options.

Preserve access to — and efficiency of — capital

Explore where to restructure debt: On the borrowing side, companies should review their current plans and determine where they could restructure or refinance. They also should review how covenants could change in a downturn, as some alternative lenders may seek more protections, even if not at the level of those required by banks. PwC analysis found that consumer discretionary, industrials and technology were the sectors with the highest percentage of debt due within two years as of the end of 2021 (the latest available data). The recent yields for lower-rated debt have risen, but remain below the COVID recession high. This means that corporates face a greater downgrade penalty compared to the recent past.

Consider strategic divestitures: Recognizing a lack of fit and choosing to divest sooner can help create shareholder value. Data from 2000 through 2021 indicates that 14% of companies pursue divestitures and 20% go through reorganizations within six months of a downgrade, according to PwC analysis of data from S&P Capital IQ. These companies were three- to six-times more likely to divest or reorganize as a means to shore up their balance sheets. Instead of waiting for a downgrade, investors should proactively assess their portfolios and determine if a near-term divestiture aligns with their business strategy. Savvy divestments allow companies to focus time and attention on their core while also generating capital that can be reinvested to transform the business. Connecting growth strategy to portfolio management allows the company to adjust for various scenarios — including a potential downturn. That’s a contrast to reactionary moves that too often result in strategic misalignment and value leakage.

Right-size working capital: Improve efficiency to confirm working capital is tuned to a declining cycle. Reductions in inventory (which could be affected by decreased demand) and receivables (declining revenue growth) and improvements in payables are reasonable aspirations during an economic decline. These can increase operational efficiency overall and result in a stronger capital position. Benchmarking, data analytics and other tools can reveal both short- and long-term possibilities.

Consider capital mobility: Private equity firms should reallocate capital among their various pools to maintain adequate returns as some portfolio companies feel the impact of a slowdown. Firms engaged in alternative investments and private debt as well as equity should leverage that flexibility to avoid capital being trapped in unproductive situations. 

Plan for customer experience challenges and improvements

Prioritize customer needs: On a regular basis, companies should determine what aspects of their particular customer experience are most important and what they need to do to preserve them. This could vary by industry, and concrete resources should be identified to safeguard the quality of engagement and maintain a company’s customer base so it can consider building on that base through M&A.

Capture sentiment directly: In making an acquisition in the downturn, understand sentiment and develop a process to conduct that analysis early in the deal. Learning from customers of a target business can be a valuable complement to dialogue with management. In addition to customer opinions and expectations, sentiment can provide another lens into the workforce – a key part of the customer experience.

Analyze to retain and expand: Use analytics to determine which customer retention incentives are more important in a slower economy. Being able to deploy those quickly in response to customer anxiety can help a company remain stable and better able to complete an acquisition in a downturn. Analytics also can identify areas of potential customer expansion in acquisition targets, which can increase deal value as the economy eventually improves.

Enable consistency while adjusting operations

Revisit pricing and incentives: Adjustments to revenue paths can’t wait until the economy worsens, especially when inflation is higher than in years past. Companies should revisit pricing strategies early and often, as well as sales force incentives, and plan for various degrees of decline.

Position supply chains for the long term: Supply chain agility will likely be more important going forward. Along with adapting their own chains, companies should secure capabilities to evaluate how tariffs and wars — existing or possible — and other disruptive factors could affect the supply chains of acquisitions.

Find efficiencies in shared services and PMO: Corporate and private buyers should have clear plans for shared services — locations, automation or otherwise — that can then be leveraged for potential acquisitions to generate immediate savings. Procurement, demand planning, accounts payable and performance reporting are a few areas where a buyer could quickly fold in a new asset. Project management office (PMO) practices also can help improve integration of an acquisition.

Recognize the value of the workforce

Assess the people in place: Ahead of any acquisition, companies need to revisit their overall workforce structure. This can provide fresh perspective on how the workforce composition has evolved and how models can be adjusted to serve the current organization and a new workforce brought in through an acquisition.

Keep growth in mind: Confirm the talent needed to deliver on growth areas. Potential buyers should confirm their employee evaluation and retention processes are up to date, especially given the potential customer impact.

Provide skills that help in the long run: Reskilling employees has become more important regardless of the economy, as technology disrupts models and presents opportunities. Companies should consider what training and skills programs could benefit existing employees who otherwise might be replaced. Leveraging employees’ knowledge of the company and arming them with new ways to be productive — especially in growth areas — can inspire more collaboration.

Bottom line

While making deals in uncertain times can be challenging, it’s also an important strategy to consider when regularly evaluating your portfolio. Companies that leverage leading practices can have significant success in creating value.

Contact us

Colin Wittmer

Colin Wittmer

Deals Leader, PwC US

John D. Potter

John D. Potter

Deals Clients & Markets Leader, PwC US

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