An increasingly complex landscape that influenced M&A in 2019 is likely to endure in 2020, with some factors potentially having an even greater impact on deal strategies. While overall deal value and volume were down from recent years, 2019 saw announcements for some of the largest deals of all time in industries ranging from pharma to aerospace. Many companies also aimed to transform their businesses or acquire new capabilities through acquisitions in other industries—most notably technology, which remains a top cross-sector M&A target.
We expect the desire to increase scale and the pursuit of tech to continue driving M&A in the near future. For example, 40% of healthcare executives said their companies are likely to acquire, partner or collaborate across healthcare sectors in 2020, citing access to technology as a reason their companies would pursue a deal. Another area that has been especially active is financial technology. Of all fintech-related deals in 2019, three of the largest involved the payments processing subsector, including Fidelity National Information Services’s $34 billion acquisition of Worldpay. Such transactions illustrate the growing emphasis on scale and technology, as fintech has morphed from a relatively nascent industry to one involving multi-billion deals in only a few years.
More broadly, dealmakers also will need to navigate multiple challenges in 2020. Issues such as a slowing economy, geopolitical strains, regulatory demands and evolving workforces could complicate the M&A environment. There’s also the US presidential election and uncertainty about what administration will be in power in 2021, which could affect deal decisions as that year approaches. But companies that can leverage the historic amount of capital available and make the right adjustments in the face of these headwinds should be resilient enough to invest in growth in 2020.
Making bold M&A deals during times of rapid change
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One defining feature of the M&A cycle is the level of capital available for deals during the past decade. Private equity firms are holding approximately $2.4 trillion, while US corporations have access to about $2.2 trillion in cash. Non-financial companies have raised about $6 trillion in debt. Even if the economy takes a turn for the worse, these levels of capital are unlikely to tighten to the extent seen during the 2007-2009 Great Recession. As a result, deal activity could avoid the substantial decline of previous downturns.
To be sure, some buyers will have greater access to capital than others, with large corporations and private equity-backed companies generally having an advantage over standalone middle-market firms. Private equity firms, flush with ample funding, will likely drive competition for large-scale spinoffs. They’ve already been deploying capital in new and creative ways—moving beyond equity funding and into alternative assets classes, such as hybrid funds and debt.
A slowing economy has historically been accompanied by a decline in company valuations, which can make some M&A targets more attractive—especially to potential buyers whose strong capital positions could keep their valuations steady. Acquirers that are opportunistic in a downturn could ultimately see more growth, as a PwC analysis found that companies that made acquisitions during the 2001 recession saw better shareholder returns than their industry peers in the months that followed.
Cast a critical eye on your portfolio. Companies should take a step back and ask, ‘Are we the optimal owners of this part of the business?’ If the answer is no, consider selling that division and redeploy that money somewhere else that’s more beneficial to shareholders.
Adjust for different opportunities and engage with stakeholders. Past downturns have helped drive new business models as companies and consumers adjusted to shifting conditions. Companies should reassess potential acquisition targets to determine which opportunities would be higher priorities in a slowdown. That can mitigate the hesitancy that some corporate boards and investment committees understandably might have to pursue deals when the economy is more fragile. Dealmakers should have those conversations early and develop a well-documented plan that explains how certain deals in a down cycle could make the company more valuable in the long run.
Recession fears have risen, but there’s capital for acquisitions
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The number of cross-border deals has declined as geopolitical tensions intensify. As the US becomes less open to trade and foreign investments, other parts of the world are growing more protectionist amid the rise of populism. This means the acquisition of US assets by non-US buyers could continue to decline into 2020. Washington is often polarized, but ensuring that US assets and intellectual property remains secure has been a bipartisan concern. Therefore, the US government will likely continue reviewing foreign investments through a stricter lens.
As the US and other countries look inward, investors will likely look more regionally versus globally to scale their businesses. This is because in a less globalized world, it may be easier to execute transactions in areas closer to home–where markets and regulations are more familiar. Take for instance, the US-Mexico-Canada Agreement (USMCA), which could support deals if Congress approves the trade pact.
Trade wars are upending global supply chains and other relationships that many companies developed during the rise of globalization. This forces companies not only to reconsider existing business models, but they could also change how corporate and private investors integrate assets going forward.
Rethink the life and structure of your deal. As the US, European Union, India and other parts of the world step up reviews of foreign investments, companies and investors should think beyond direct acquisition or ownership of assets. Start with a partnership, alliance or joint venture with the target or a private equity firm interested in investing in that target. These transactions could help companies successfully execute a deal, since they could offer more flexibility for buyers and potentially carve a path toward direct ownership.
Reassess your supply chains. Parts of Europe, Asia and Latin America have become more protectionist, which means it will be critical to ensure that supply chains remain stable or can be adjusted if they’re in regions at greater risk of disruption. Diversifying supply chains can help mitigate the risks of retaliatory tariffs and other regulations limiting foreign investments.
Investors could look regionally as geopolitical tensions rise
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Government regulations could complicate some megadeals in certain industries, particularly those with only a handful of market leaders. Transactions involving technology and sensitive data also may come under a stricter lens, as the US Federal Trade Commission and the US Department of Justice consider more antitrust investigations of large tech companies. Regardless of the outcome of the US presidential election, major reform of US antitrust laws seem less likely than incremental regulations over data privacy, online advertising and other issues.
Critically, states and municipalities have taken their own actions with regulations that affect not only tech companies but other sectors where data is a major part of the business. For instance, privacy laws in California and Maine go into effect in 2020 and could be a prelude to requirements in other states.
The regulatory environment impacts nearly all stages of a deal. For megadeals, antitrust concerns can lead to delays and jeopardize the anticipated value of a deal. For transactions that cross state and municipal lines, dealmakers will need to determine how different requirements can affect an asset’s value on the front end and integration after the deal closes.
Make regulations a bigger factor in your business strategy. Increasingly in 2020, existing and emerging regulations could impact products, services and workforces. This means it will be more important for companies to measure the risks and develop ways to gain a competitive advantage. For instance, the General Data Protection Regulation (GDPR) includes new privacy-related requirements for European companies, which presents another consideration for potential buyers. The California Consumer Privacy Act (CCPA) will do the same for businesses in that state when it takes effect in 2020. So early in the deal process, determine how much it will cost to comply with regulations, as well as develop plans for how the company will adapt if the rules change.
Watch state and local regulations. As dealmakers maneuver through a fractious regulatory landscape, watch closely how state and municipal rules could impact deals. For example, a growing number of states have passed new minimum wage laws in recent years. Such rules could have far-reaching implications in deals where the target’s operations span multiple cities and states. A thorough diligence process needs to factor regulations at all levels into the execution of transactions.
States and municipalities add to regulatory uncertainties over M&A
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As technology becomes more of a focus at many companies, investors are increasingly looking beyond facilities, equipment and other tangible assets. Instead, they’re buying businesses for their specialized talent and workplace cultures. This comes as the US economy reaches full employment, intensifying the war for talent. As companies focus more on retaining key people, they’re also managing workforces with as many as five different generations working side-by-side—the widest age range in history. A multi-generational workforce presents diversity of thought and perspective, but it also can create challenges, especially when it comes to managing varying work styles and career expectations, including workplace mobility/flexibility and deferred retirements.
Looking ahead, dealmakers need to form a deeper understanding of a target’s talent and culture—and in many cases, be open to different ways to retain and integrate key employees as the war for talent continues. This means it will be important not only to evaluate the skills being acquired, but to also review what types of training employees will need in the future to help drive growth. This could include technical skills needed to manage and maintain new technologies, as well as the skills required to manage people and develop effective leaders in a newly combined company.
A company’s innovation and growth are only as strong as its workforce. Technology helps companies become more efficient, but a diverse workforce can propel new ideas and creativity. Failing to accurately assess an organization’s skills or cultural differences before closing a deal risks eroding the value anticipated from the transaction.
Evaluate workforce needs, not just skills. Evaluate what matters to the workforce you plan to acquire—whether it’s new training, more workplace flexibility, various types of incentives or something altogether different. This should be part of a thorough diligence process, where it will be critical to assess employee skills and behavior while also addressing what they will need to be successful during the post-deal integration and in the years that follow.
Gather input at the ground level. Due diligence also can be an opportunity to check the pulse of the target company beyond the C-suite. To form a deeper understanding of an organization’s culture and talent, ask key employees to describe the best example of when their company has successfully driven change, including what they learned from the process, what went well and what didn’t. The answers could provide meaningful insight into future performance.
Talent and culture matter as the need for specialized skills grows
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Deals Leader, PwC US
Deals Partner, PwC US