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Deal them in: CEOs say M&A is in the cards going forward

24 March, 2021

Colin Wittmer
Deals Leader, PwC US

Following a dramatic rebound in the second half of 2020, deal activity likely will remain steady as 2021 progresses. Corporate and private investors have both the appetite and ammunition for M&A, and many see deals as a path to growth. That’s not just my opinion. Consider what business leaders told us in PwC’s latest CEO survey, with 57% of US executives saying their companies plan to pursue new M&A in the next 12 months. That far outpaces the 30% who plan to enter a new market and the 26% who expect to collaborate with entrepreneurs and startups as a way to drive growth.

US CEOs also are more bullish on deals than the rest of the world: Only 30% of CEOs globally said their companies will pursue M&A over the next year. In fact, of 51 countries covered in the survey, only one other country — Australia, at 63% — indicated more optimism about M&A among executives.

But maybe most telling of all when it comes to US executives’ interest in M&A is in comparing the latest survey to the previous one, in which 54% said they planned a deal in the next 12 months. That was before the COVID-19 pandemic struck and deal activity plunged in the second quarter of 2020. Yet more CEOs this time around — perhaps emboldened by last year’s second-half surge — say M&A is on the table. That tells me they expect deals to stay on an upward trajectory.

Why so thirsty for deals?

The main reasons cited by CEOs for exploring deals mirror what we’re hearing from our clients. Acquisitions can allow companies to increase or differentiate what they offer customers and also provide access to new or leading capabilities. The latter has become more important as many companies attempt to accelerate digital transformation and need technology and skilled employees to make that happen. This also matches what we’ve seen with cross-sector deals, as several types of non-tech companies have bought tech businesses in an effort to expand their scope. UnitedHealth Group’s acquisition of Change Healthcare is one example.

Another motivator for M&A — consolidation within a sector — aligns with the continued interest in megadeals we’ve witnessed in multiple sectors. Those transactions of $5 billion or more are a significant way to increase scale within an industry, as strong players look to solidify their positions. Think of Teledyne’s $8 billion deal for FLIR in the sensor technology space. In some sectors, however, major acquisitions will have to navigate growing antitrust scrutiny in Washington.

Divestitures and an enduring seller’s market

Of course, buyers need sellers, and CEOs shared their thoughts on what’s driving divestitures this year.

The healthy share of responses for refocusing on the core business — plus those who cited strategic repositioning — echo what we often encourage clients to think about with divestitures: Financial pressure isn’t the only reason to part with a piece of your company. Yes, we’ve seen distressed companies sell businesses, and that’s likely to continue as the economy recovers from the pandemic. But strategic divestitures, including those by market leaders and others in strong financial positions, can reap benefits, particularly with valuations overall remaining high.

What also resonates with divestitures is how few companies plan to sell compared with those that expect to buy. Only 21% of US CEOs said they plan a divestiture in the next 12 months. Globally, that number was only 13%. So, with nearly three times as many execs planning to acquire versus divest – along with those high valuations – you can expect a seller’s market for the time being.

Forces that can influence deals

High valuations ordinarily could present a hurdle for some acquirers, but the CEO survey found what we previously said before the pandemic and recession struck: Funding is plentiful and available for deals. Seven out of ten US executives — and eight out of ten at public companies — told us they’re not concerned about access to affordable capital. Only 10% said they’re extremely concerned.

Instead, other issues and trends were much more top of mind. Concerns about how the economy could affect growth are understandable, although that response actually is down slightly from the previous survey. In addition, while they are still areas of concern for US CEOs, geopolitical uncertainty, trade conflicts and protectionism all saw lower responses than in the 2020 survey. This is when I’ll note that US cross-border M&A volume in the fourth quarter of 2020 — both inbound and outbound deals — was the highest in several years, according to a PwC analysis of Refinitiv data.

Still, there are areas in which the level of concern increased among execs over the past year. CEO responses on social instability, climate change and economic inequality illustrate how environmental, social and governance (ESG) issues have become more important, with more investors assessing how those issues affect asset values. ESG concerns are even more pronounced among public company executives, and private equity firms also are sharpening their ESG focus with “buy dirty and cheap, sell clean and expensive” strategies, as our March 2021 PwC Pulse Survey noted. Whether you’re a buyer or a seller, the decisions you make need to be good not only for the bottom line but the world at large. ESG isn’t about simply checkmarking a regulatory box. It’s contributing to society and helping others thrive, which creates sustainable advantage and value.

CEOs also are aware of the impact of technology and need for workforces to be adept with it — both of which can have a significant impact on company valuations in deals. Evolving business models require combining people with the right technologies — such as artificial intelligence, automation and cloud — to drive the right business outcomes. Doing so efficiently and effectively only elevates your appeal as an acquirer or a target.

These concerns voiced by CEOs show that navigating the deal cycle presents plenty of challenges, from determining the right growth strategy before considering a specific deal to completing a successful integration after a transaction closes. But the appetite and ability to pursue M&A clearly are there, and as the survey and our 2021 deals outlook indicate, we’ll see the deal market remain steady as the rest of this year unfolds.