The COVID-19 pandemic and economic recession are causing significant shifts in individual and group behavior, business practices and social norms. These shifts are influencing consumer decisions and business operations and reshaping the types of M&A and other deals companies will pursue in the months and years ahead. Companies that successfully execute deals usually excel in finance, strategy, operations and process management. But the recent health crisis has shown the need for these core skills to expand, with sociology and psychology also being considered in M&A strategies and tactics.
As history has shown, crises prompt change. World War II led to a surge in women’s participation in the labor force. The Sept. 11, 2001, attacks altered transportation and security policies around the world. China’s 2003 SARS outbreak changed consumer attitudes toward shopping, leading to the rise of Chinese e-commerce giants while accelerating the launch of digital payment platforms.
The economic and sociological consequences of COVID-19 will endure for years as well. Pandemics can mark “the beginnings of new ways of being and of thinking,” author and historian Jon Meacham said, referring to the Black Plague in the mid-1300s. The COVID-19 crisis is another inflection point, and below we explore six fundamental changes in the deals environment we believe will likely persist in the long term.
Until a vaccine is discovered and widely distributed, the health crisis likely will continue. It may be episodic, with outbreaks in different regions at different times — forcing lawmakers to mandate social distancing, mask wearing and other measures that will affect businesses.
Corporate outlooks reflect this uncertainty: From Jan. 1 through July 31, 2020, 851 US companies suspended or withdrew guidance on expectations of the market, compared to just three in 2019 and 27 in 2008, the height of the Great Recession, according to a PwC analysis of Capital IQ data. Our analysis also found that the scale of uncertainty has brought unprecedented disagreement across leading economic forecasts.
Even after a vaccine is developed, health concerns will likely linger and extend this period of uncertainty. In more typical crises, past experiences dictate many aspects of how businesses respond, from formal strategic planning to the heuristics or judgment shortcuts that individuals use to execute business daily. As the health crisis continues, dealmakers are realizing that their previous “downside” playbooks no longer apply.
Never in our lifetimes have concepts of social space been more heavily debated. It’s also more evident than ever that physical space and social interactions are intertwined into the very fabric of our society. This has created a wide range of impacts, including early signs of a reversal in decades-long urbanization trends. Homes have become the nexus for education, entertainment and most family activities.
Nowhere is the debate around space more apparent than the rise of working from home. According to a June 2020 PwC report, most office workers said they want options to work remotely at least once a week, while 55% of executives surveyed expect to offer that choice. Traditional offices won’t become totally obsolete; the survey also showed half of US executives said they’ll need more office space due to longer-lasting requirements for social distancing or workforce growth. But working from home will likely be semi-permanent at many businesses.
One of the most consistent business concepts of the last 50 years was the drive for efficiency, with its greatest manifestation the development of global supply chains. These chains became the engine for delivering low-cost goods throughout the globe — not only reducing labor costs but helping build single sources of supply that created further cost advantages through scale.
For many companies, the drive for efficiency led to reliance on China, due to its advantages in both cost and scale. Geopolitical tensions have challenged the relationship with China over the last several years. Now, supply-side vulnerabilities during the health crisis have given this shift additional momentum, further driving doubt into the concept of single sourcing. The fact that production of many critical goods, such as essential medical supplies, is concentrated in China magnifies these tensions.
As a result, many companies are focused on supply chain vulnerabilities. From January to May 2020, earnings calls of the world’s 2,000 biggest listed firms mentioned supply-chain disruption nearly 30,000 times, up 30% from the same period in 2019, The Economist reported, while mentions of efficiency decreased 17%.
The shift in shopping patterns suggests consumers will be more selective than ever – not only with what they choose to buy, but also how they prefer to shop. As the economy recovers from the health crisis, most consumers also are unlikely to return to normal spending levels even as stay-at-home orders are lifted, according to a May 2020 PwC survey of US consumers.
This signals that even as health risks subside, consumer tastes and preferences will become more uneven and complex. For example, some consumers will be more willing to fly while others won’t book a reservation unless they can easily cancel. These, and other changes in consumer behaviors will emerge differently across age groups, making it even more important to segment individual markets when making business decisions.
Such trends could have wide-ranging deals implications. Investors will place a higher value on companies that can quickly adapt to new consumer behaviors, and these adjustments could take shape in different ways. Take fast-casual restaurant chains, for instance, with some companies planning to invest in more drive-thrus with separate lanes for digital order pick-up.
Those businesses willing to innovate to meet consumer needs in the recession can not only build customer loyalty but also be strongly positioned to take market share in the years ahead. Given the sweeping impacts of the pandemic, companies that operate with the common good in mind — from creating a safe environment for employees and customers to assisting those hit hardest by the recession — can come out ahead.
Economic, social and political crises often drive shifts in public policy. For example, the 2007 financial crisis led to broad regulatory changes in the US and globally. This recession is another crisis, and the policy changes potentially in play include privacy and antitrust laws.
The health crisis has led to proposed legislation that would enable more data collection for public safety purposes while still protecting privacy. Slightly more than half of Americans say it would be acceptable for the government to use people’s mobile devices to track the locations of people who tested positive for COVID-19, a Pew Research Center survey in April 2020 found.
But even as citizens increasingly rely on today’s biggest tech companies for work, education, healthcare, entertainment and countless other services amid the health crisis, US lawmakers remain concerned about the dominance of tech giants. These opposing yet intertwined forces will likely complicate and shape debate over antitrust and data privacy rules going forward.
Amid nationwide demonstrations for social justice, many are realizing there’s significantly more to be done to end societal systemic racism. This comes as the health crisis exposes health disparities among Black and Latinx communities. In addition, there’s more focus on the threats of climate change to companies and, by proxy, the financial markets.
At the corporate level, shareholder and customer scrutiny of a company’s labor practices, talent management, product safety, risk assessment, crisis response and data security has never been higher, magnified in large part by social media. While the bottom line remains important, executives and boards are increasingly reviewing board diversity, executive pay, business ethics and other elements of ESG.
Private equity firms can also expect to see increased focus from limited partners and potential investors on how they’re addressing these risks in future deals and ongoing investments. Companies with management practices that consider broader industry, regulatory and societal risks are more likely to drive long-term sustainable performance, shareholder value and greater investment returns.
Deals Leader, PwC US
John D. Potter
Deals Clients and Sectors Leader, PwC US