How the new environment is changing M&A deals
The economic waves created by geopolitical realignments and the ongoing COVID-19 crisis will likely have lasting impacts on many aspects of people’s lives. The combination of a global virus outbreak, the shutdowns that happened in many parts of the economy and the ensuing changes in behavior is significantly different from previous societal shocks. Russia’s invasion of Ukraine and the Sino-American rivalry have helped disrupt decades of globalism.
While the economy has been upended by these developments, many companies are still in a solid position to consider merger and acquisition (M&A) activity in the medium to long term. One big reason is the unprecedented amount of capital that was available for growth through M&A and other investments before the pandemic. Cash on corporate balance sheets and private equity dry powder are still high. While rising interest rates have added a new wrinkle, some acquirers should still be able to execute on transactions that align with their growth strategy and help deliver excess returns.
Even in this turbulent climate, the essential ingredients of deal success haven’t changed. Companies should have a sound strategy that covers the entire deal process, from selecting a target to capturing value after the transaction. They should also have the ability to execute on a deal — not just the financial capacity, but also the right mindset of everyone from the board of directors to the deal team.
With the above drivers, businesses need to understand the impacts on three key areas that are critical to creating deal value:
Strategic positioning involves determining which capabilities are needed to capture the greatest value and how businesses should be repositioned — models, markets and in other ways — to better capitalize on value drivers. Companies should fundamentally reassess existing views, develop a new vision of the future and determine how to bridge gaps to obtain the right capabilities. This includes challenging basic beliefs about consumer behaviors, revisiting assumptions about both product and process technology, and closely examining the recovery trajectories of target markets. Companies also should reconsider regions and nations outside their home countries that could become better-positioned for investment.
Performance improvement is how an organization leverages its capabilities to capture value, and how deals can deliver value in a post-crisis environment by identifying the new levers of value and opportunities for business improvement. It involves all aspects of profit pools: where value accrues in the value chain, what inorganic opportunities can capture that value and what levers can create greater value. This includes the nature of a company’s channels to markets and pricing, its supply chain decisions and its workforce. As a result of COVID-19, companies should balance productivity and safety issues while placing more emphasis on resilience.
Asset utilization addresses what companies use to both run existing businesses and expand their portfolios. The pandemic, geopolitical uncertainty and resulting economic disruption require a fundamental refocus on allocating capital and generating appropriate returns, including the discipline to redeploy if returns are insufficient. This includes divesting businesses with subpar returns, even if they’re performing as expected. It also involves calibrating working capital investment with value chain alignment, deploying capital expenditures where payback and returns drive further investment, assessing tax consequences and maintaining appropriate debt and capital structure.