Deals industry insights

2021 outlook: M&A leads the economic recovery

The M&A recovery that began in the second half of 2020 will accelerate in 2021, as corporate and private investors have access to capital and can pursue deals to build scale and expand scope.

For some, growth will come within industries, with market leaders strengthening their position as the economy continues to recover. Others, seeing their business models upended by the COVID-19 pandemic, will explore how small or medium-sized bets in adjacent sectors can help drive transformation. And M&A targets will come from a growing pool of sellers — businesses that have fallen into distress during the recession, private investors that always think about holding periods and exits, and companies that are reassessing strategies and could part with non-core assets, especially as valuations remain high.

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Challenges and opportunities for deals in 2021

PwC's Deals Sector Leader John Potter discusses the trends driving deals and outlook for 2021.

What’s driving deals

The arrival of a new presidential administration could bring US policy changes that affect deal decisions to differing degrees, especially if control of the Senate also changes. New laws and regulations on tax, trade, healthcare and the environment will require adjustments by many different types of businesses, and industries such as financial services and big tech could face specific rules. But the transition from President Trump to President-elect Biden and the prioritization of pandemic policy — plus a continued partisan divide in Congress and the uncertain pace of cabinet appointments — may limit immediate broad regulatory actions.

Instead, we see deal activity, which already is leading the overall economic recovery, being influenced more by new dynamics that have emerged during the pandemic and will play a significant role in deals in 2021.

Where should you focus in this volatile climate? 

Digital transformation

Companies that invest in innovation and technology during times of crisis can emerge stronger, from increased efficiency to new products and services that disrupt the market. COVID-19 already has started driving transformation in multiple sectors, and companies need to determine which technologies will keep them competitive in a still-uncertain economy.

In our June 2020 Pulse Survey of US financial executives, 56% said tech investments during the pandemic would make their companies better in the long run, and only 17% said they were considering deferring or canceling planned investments as a result of COVID-19. More recently, 76% of business leaders surveyed in our November 2020 US Pulse Survey said that their companies plan to increase investment in digital transformation in 2021.

Purpose and inclusion

Environmental, social and governance (ESG) issues have evolved from a “nice to have” conversation to a business imperative that can affect long-term success and value creation. From green initiatives to diversity in leadership and workforce to their commitment to equality, justice and other societal issues, companies are more accountable to shareholders and customers than ever. PE firms also have seen COVID-19 accelerate the focus on ESG.

More than 50% of executives in our November pulse survey said their companies plan to increase diversity and inclusion training for employees. Nearly 60% of consumers in another survey said that a company’s purpose or values play an important role in their purchasing decisions. That impact on profits means acquirers and their targets have to assess the workforce, the composition of the management team and board of directors, the overall brand promise and other factors differently when considering a company’s valuation and the potential returns on a deal. And transparency and measurement will be more important than statements on vision and values.

Next steps for dealmakers

We think M&A will recover ahead of the US economy, but it’s crucial to be prepared, especially as tech continues to transform sectors, and business models evolve. To successfully identify, execute and integrate deals that help meet new customer expectations and outpace competitors, here’s what you can do now.

Navigate the capital landscape

There’s no question industry leaders and top PE firms are in a strong position to buy, but the rise of SPACs and other alternative capital structures changes the equation, and a seller’s market still endures. Meanwhile, hot startups and other desirable acquisition targets need to ensure they’re considering all options to win investment and access capital, which could mean not only dual-tracking but possibly multitracking. 

Anticipate potential policy changes

The transition to a new US presidential administration likely means dramatic policy changes won’t be immediate, especially if the Senate remains in Republican control. Yet new rules and regulations are certainly possible in 2021, and companies should develop a forward-looking view that will help insulate them from any tax or other financial impacts that could derail deal strategy.

Consider proactive restructuring

Companies too often conduct a thorough review of their businesses after adverse conditions emerge. Even those that have held up well in the recession still could benefit from taking a fresh look at more promising growth paths and determining which parts of their organization will lead the way and which could be boosted by a capital infusion from a strategic divestiture.

Ensure digital skills boost performance

Transformation doesn’t come only from acquiring technology. A workforce that can’t fully leverage technology will ultimately detract from a tech acquisition’s value. Buyers need to ensure they can scale an acquired tech, as well as manage workplace cultural differences that often arise in transactions, especially when non-tech buys tech.

Throw out the old ESG approach

Companies as a whole can do more to establish and articulate their role as the pandemic, calls for equality and justice, and climate change are challenging past behaviors. PE investors also have higher expectations for how firms work at the portfolio level to help protect or enhance the value of businesses. Dealmakers are used to focusing on hard assets and specific dollar figures, but ESG is here to stay in M&A. Buyers and sellers have to honestly evaluate how their efforts will be viewed in today’s environment and what changes are needed to be an appealing deal partner.

Embrace the virtual deals process

Vaccines are on the way, but the pandemic will have a lasting impact on some aspects of how deals get done. Whether it’s diligence, negotiation and integration in M&A or valuation and separation in carve-outs, you should be both honest and creative about what you can do now and what needs to change to improve the chances of deal success.

Contact us

Colin Wittmer

Deals Leader, PwC US

John Potter

Deals Sectors Leader, PwC US

James Marshall

Deals Research and Insights Leader, PwC US

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