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The COVID-19 pandemic has brought about significant shifts in individual and group behavior, business practices and social norms. These shifts are influencing consumer decisions and business operations and reshaping the types of mergers and acquisitions (M&A) and other deals companies will likely pursue in the months and years ahead. Companies that successfully execute deals usually excel in finance, strategy, operations and process management. But the pandemic has shown the need for these core skills to expand, with sociology and psychology also being considered in reshaping M&A corporate strategies and tactics.
As history has shown, crises prompt change. World War II led to a surge in women’s participation in the labor force. The September 11, 2001 attacks altered transportation and security policies around the world. China’s 2003 SARS outbreak changed consumer attitudes toward shopping, leading to the rise of Chinese e-commerce giants while accelerating the launch of digital payment platforms.
The economic and sociological consequences of COVID-19 will likely endure for years as well. Below, we explore six fundamental changes in the M&A deals environment we believe will persist in the long term:
- Concepts of space
- The need for resilience
- New consumer behaviors
- Regulatory shifts
- Prioritizing ESG
Concepts of space: Workforce needs change how companies integrate
There may have never been a time where concepts of social space have been more heavily debated. It’s also evident that physical space and social interactions are intertwined into the very fabric of our society. This has created a wide range of impacts, including early signs of a reversal in decades-long urbanization trends. Homes have become the nexus for education, entertainment and most family activities.
Nowhere is the debate around space more apparent than the rise of working from home. Traditional offices won’t become totally obsolete, but working from home will likely be semi-permanent at many businesses.
Deal implications
- Reevaluate workforce compensation and rewards. For buyers planning to integrate an acquired workforce, engaging and retaining talent has often been challenging. Today’s US workforce spans five generations, each with different needs. These differences influence how companies manage talent, which will likely now be complicated by remote work. For example, mid-career employees balancing new family obligations may value flexible schedules and vacation time more than money. Such shifts should be considered in assessing workforces during a deal.
- Understand the next wave of workers. While the pandemic has affected people of all ages, the long-term effects on Generation Z — those born from the mid-1990s to the early 2010s — could be particularly severe. The disruption to structured learning will likely be one of many pandemic consequences shaping their needs, expectations and abilities as they enter the workforce. That could test dealmakers’ traditional methods of determining the value of a workforce in an acquisition or divestiture.
- Elevate training and communication. The new nature of work in many industries means it may be critical to evaluate and assess proper levels of digital training for employees — something that may be lacking among parties in a deal. And as companies look to integrate acquisitions, frequent and focused communication will likely be critical to compensate for limited in-person interaction, provide clarity and help with retention
The need for resilience: The quest for cost effectiveness takes a back seat
One of the most consistent business concepts of the last 50 years was the drive for cost effectiveness, with its greatest manifestation the development of global supply chains. These chains became the engine for delivering low-cost goods throughout the globe — not only reducing labor costs but helping build single sources of supply that created further cost advantages through scale.
For many companies, the drive for cost effectiveness led to reliance on China, due to its advantages in both cost and scale. Geopolitical tensions, fueled partly by the rise of populism, have challenged the relationship with China over the last several years. Supply-side vulnerabilities during the pandemic gave this shift additional momentum, further driving doubt into the concept of single sourcing. The fact that production of many critical goods, such as essential medical supplies, is concentrated in China exacerbates these tensions. As a result, many companies are focused on supply chain vulnerabilities.
Deal implications
- Vertical integration in play, except when it isn’t. In some segments we expect to see less vertical integration in the long term, as companies focus their capital discipline on core functions of their business and potentially outsource other functions. This will likely drive companies to sell assets that no longer fit with their core business. Conversely, the focus on resilience and control of strategic business elements will likely lead other sectors to extend further into the value chain, where capital may generate outsized returns.
- Investments increase in new supply chain technologies. The need to “pandemic-proof” parts of the supply chain helped steer capital toward previously underfunded areas, such as risk management and warehousing tech, according to a June 2020 Pitchbook report.
- Develop more agile tax models. Companies should evaluate tax models that anticipate short- and long-term considerations, including extraordinary costs, supply chain disruptions and softened business outlooks. They can consider measures such as evaluation of transfer pricing models for sharing risk/loss, impact on structural effective rates and M&A scenario planning.
New consumer behaviors: Innovation could distinguish buyers from sellers
The shift in shopping patterns suggests consumers will likely be more selective — not only with what they choose to buy, but also how they prefer to shop. As health risks subside, consumer tastes and preferences are becoming more uneven and complex. For example, some consumers are more willing to fly while others won’t book a reservation unless they can easily cancel. These, and other changes in consumer behaviors may emerge differently across age groups, making it even more important to segment individual markets when making business decisions.
Such trends could have wide-ranging deals implications. Investors will likely place a higher value on companies that can quickly adapt to new consumer behaviors, and these adjustments could take shape in different ways. Those businesses willing to innovate to meet consumer needs may not only build customer loyalty but also be strongly positioned to take market share in the years ahead. Given the sweeping impacts of the pandemic, companies that operate with the common good in mind — such as creating a safe environment for employees and customers — will likely come out ahead.
Deal implications
- Reassess potential buyers and sellers. Consumer behaviors have contributed to shifts in the directions of many industries. Within sectors, some companies have stronger capital positions than others. That not only could determine who is a buyer and who is a seller, but also how a company’s value is assessed, since previous growth models no longer apply.
- Enhance tech capabilities and explore tech transfer. Sellers that can show how investment in new or existing technologies has paid off for customers and kept business stable could command more value in a transaction. Conversely, buyers should assess how tech that has been successful with a target’s customers could be applied to other businesses during integration.
- Agility is no longer optional. Some new consumer behaviors might endure, but others will likely change or emerge. Nimble business models are likely to generate more value in deal negotiations and allow for a smoother integration. Also, if one party in a transaction has a stronger record of being agile, dealmakers should consider how that agility can translate to other areas of the business during the diligence and integrations phases of the transaction.
Regulatory shifts: Privacy and antitrust laws take a different direction
Economic, social and political crises often drive shifts in public policy. For example, the 2007 financial crisis led to broad regulatory changes in the US and globally.
But even as citizens increasingly rely on today’s biggest tech companies for work, education, healthcare, entertainment and countless other services, US lawmakers remain concerned about the dominance of tech giants. These opposing yet intertwined forces will likely complicate and shape debate over antitrust and data privacy rules going forward.
Deal implications
- Relaxed rules shouldn’t determine privacy practices. COVID-19 led to less enforcement and waived penalties around privacy in areas such as healthcare, which saw a rise in telemedicine. But that’s not an excuse for companies to compromise privacy and data protection. Dealmakers should assess if the parties in a potential transaction have an adequate focus on customer and employee experience and trust and that they’re making serious efforts to uphold privacy-friendly practices. Examples include installing privacy principles in customer loyalty programs and developing formalized employee privacy programs.
- Big tech’s services shape antitrust laws. The pandemic complicated debate over the scale of tech giants and their market dominance, since technology has played a critical role in managing the spread of the virus while helping businesses stay open. Major antitrust reforms could be difficult, but potential acquisitions by big tech companies will likely continue to be scrutinized.
- State and local governments become more active. Before the pandemic, some states and municipalities took their own actions to regulate industries where data was a major part of the business. For example, privacy laws in California and Maine went into effect in 2020, and other state and local governments could be more proactive. It may become critical for dealmakers to watch regulations across all levels of government.
Prioritize purpose and inclusion: Dealmakers respond to evolving ESG concerns
Amid nationwide demonstrations for social justice, many have realized there’s significantly more to be done to end systemic racism. This came as the pandemic exposed health disparities among Black and Latino communities. In addition, there has been more focus on the threats of climate change to companies and, by proxy, the financial markets.
At the corporate level, shareholder and customer scrutiny of a company’s labor practices, talent management, product safety, risk assessment, crisis response and data security has never been higher, magnified in large part by social media. While the bottom line remains important, executives and boards are increasingly reviewing board diversity, executive pay, business ethics and other elements of environmental, social and corporate governance (ESG).
Private equity firms can also expect to see increased focus from limited partners and potential investors on how they’re addressing these risks in future deals and ongoing investments. Companies with management practices that consider broader industry, regulatory and societal risks are more likely to drive long-term sustainable performance, shareholder value and greater investment returns.
Deal implications
- Assess ESG risks and opportunities. Considering the greater focus on evolving risks, due diligence should address material ESG risks, as well as how often a target company has been pressed by investors, customers and other stakeholders to address ESG concerns. Acquirers should evaluate if the target has built ESG considerations into its strategy — whether the investment is for a short-term hold period or long-term ownership. Information on ESG-related risks can both support long-term value creation and reduce the chances of near-term ESG-related exposures that can damage a company’s brand.
- Form a deeper understanding of workforce diversity, equity and inclusion. Workforce diligence in a deal should go beyond the basics of headcount, payroll and traditional analysis. For acquirers, it’s critical to assess ethnic and gender diversity and inclusion programs at the target company and compare them to their own practices and programs. This is relevant not only for determining the full value of a workforce, but also for developing the M&A integration plan. This diligence should also extend to executive leadership and the board of directors.
- Move beyond the branding of “going green.” Environmental regulations vary by country and state and can be a critical compliance risk. Dealmakers should conduct further diligence into a target’s environmental profile and claims, to confirm the company is not providing misleading information that its products or services are environmentally sound. Beyond assessing data for emissions, carbon footprint and other climate-related risks and opportunities, dealmakers should go deeper and evaluate raw material sourcing, water usage and other factors. As both customers and investors increasingly focus on the impact of their purchasing decisions — from cars to cleaning products to packaging — dealmakers should consider evaluating environmental impacts along the entire life cycle of a target’s products and services.
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