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Look before you leap: Policy diligence in deals

16 May, 2018

Alison Kutler
Principal, Strategic Policy Leader, PwC US

Ever since Brexit took the world by surprise in 2016, companies have grappled with increased geopolitical uncertainty. Today, the Trump administration can rewrite policies with the tap of a tweet. Typically, companies are cautious and stay in shallow waters during volatile political periods. Yet we had a breakthrough for mega-deals at the beginning of 2018. Last quarter, 26 deals worth more than $5 billion in value were announced, and overall deal value rose 48% year-over-year. PwC examined this phenomenon in our “Industry Insights,” but one thing stands out: Despite the current dynamics, companies are still reaching high deal value.

Navigating the gray

Attitudes about uncertainty are shifting as companies find success with inorganic growth. By arming themselves with key policy and regulatory insights, executives can successfully navigate the complicated landscape. Companies should consider these five trends in re-evaluating their deals strategy:

  1. Protectionism: Nationalism is becoming a global trend, with governments looking to protect their countries from foreign rivals. The Committee on Foreign Investment in the United States (CFIUS) has been increasingly assertive, denying foreign investment in the US tech sector on multiple occasions for national security reasons. These policies will likely increase as other nations react to Trump’s “America First” actions. As a result, companies looking to acquire or merge with foreign entities should develop more comprehensive strategies to tell the right story to regulators and consumers about the benefits of their proposed deals.
  2. Supply chain disruption: The administration’s current tariff stance could have a major impact on multiple industry supply chains, a critical factor when engaging in deal discussions. Domestic and foreign companies must be prepared to rethink planned investments to achieve vertical integration and address possible changes in their cost structures. Supply chains that depend on imported equipment and materials may need to be reconfigured.
  3. Antitrust scrutiny: Regulators are increasingly concerned about the impact of vertical integration in industries such as media and telecom, as large companies confront the impacts of consolidation. As PwC noted, hostile antitrust reaction has had a measurable impact on media deals, with companies waiting on the results of pending litigation before entering into agreements. While technology deal value increased by 76% in Q1 2018 versus Q4 2017, media deal value dropped 53%. However, a positive result in court could set a calmer tone in future vertical deals, including in other sectors such as healthcare.
  4. Data management: With value up for grabs in the market, data privacy and cybersecurity concerns have never been more prominent, with widespread public attention any time consumer data is compromised. Moreover, GDPR enforcement is at hand. Poor privacy practices may lead to unexpected exposure to fines or litigation, as well as reputational risk. As policymakers scrutinize privacy and cybersecurity practices, companies should closely review each others’ data footprints and data management practices before entering into an agreement.
  5. Trust in technology: Artificial intelligence, augmented reality, IoT and other emerging technologies offer major value for companies engaging with cutting-edge operators in this relatively unregulated space. These fields are a rare opportunity for new players to shape government policy and get in on the ground floor of an exploding market. By developing a proactive government relations strategy that properly educates lawmakers on a given technology’s capabilities and risks, companies can tap into the value of minimally regulated, high-growth global markets.

While these policy challenges could test deals, those who approach these challenges strategically can overcome this regulatory uncertainty. That means engaging policy stakeholders early and understanding their decision-making framework. The current geopolitical environment still holds plenty of opportunity for companies who want to dive in. Just remember to look before you leap.