How the global pandemic and economic recession are changing the M&A environment
The COVID-19 crisis will have lasting impacts on many aspects of people’s lives, even after a vaccine is developed. The combination of a global virus outbreak and a self-imposed shutdown in many parts of the economy is significantly different from previous recessions and societal shocks. The Great Recession in 2007-2009, for example, had major financial and economic implications for individuals and businesses, but its enduring effects were mostly regulatory.
While the economy has been upended by the pandemic, a majority of companies aren’t changing their M&A strategy as a result. Deal activity has declined in 2020, but many companies are in a solid position to consider acquisitions during the downturn. One big reason is the unprecedented amount of capital that was available for M&A and other investments before the pandemic: Cash on corporate balance sheets and private equity dry powder are high, and borrowing interest rates have been low. And now the pool of potential sellers could grow as valuations drop from the highs of recent years.
History will prove instructive in the current crisis. As PwC’s research shows, organizations that make deals in a recession can see higher shareholder returns than their industry peers. While opportunities aren’t spread evenly across companies and sectors, some acquirers should be able to execute on transactions that align with their growth strategy and could help deliver excess returns. Considering the more reliable sources of capital and declining market valuations, we expect M&A activity to recover more quickly than the overall economy, with acquisitions leading certain sectors out of the downturn.
Even in this turbulent climate, the essential ingredients of deal success haven’t changed. Companies should have a sound strategy that covers the entire deal process, from selecting a target to capturing value after the transaction. They also must have the ability to execute on a deal — not just the financial capacity, but also the right mindset of everyone from the board of directors to the deal team.
With the above drivers, businesses need to understand the impacts on three key areas that are critical to creating deal value:
Strategic positioning involves determining which capabilities are needed to capture the greatest value and how businesses should be repositioned — models, markets and in other ways — to better capitalize on value drivers. In the COVID-19 environment, companies need to fundamentally reassess existing views, develop a new vision of the future and determine how to bridge gaps to obtain the right capabilities. This includes challenging basic beliefs about consumer behaviors, revisiting assumptions about both product and process technology, and closely examining the recovery trajectories of target markets. Companies also should reconsider regions and nations outside their home countries that could become better-positioned for investment.
Operational excellence is how an organization leverages its capabilities to capture value, and how deals can deliver value in the post-crisis environment by identifying the new levers of value and opportunities for business improvement. It involves all aspects of profit pools: where value accrues in the value chain, what inorganic opportunities can capture that value and what levers can create greater value. This includes the nature of a company’s channels to markets and pricing, its supply chain decisions and its workforce. As a result of COVID-19, companies should balance efficiency and safety issues, while placing more emphasis on resilience.
Capital efficiency addresses what companies use to both run existing businesses and expand their portfolios. The pandemic and economic downturn require a fundamental refocus on allocating capital and generating appropriate returns, including the discipline to redeploy if returns aren’t sufficient. This includes divesting businesses with subpar returns, even if they’re performing as expected. It also involves calibrating working capital investment with value chain alignment, deploying capital expenditures where payback and returns drive further investment, ensuring precision in tax efficiency, and optimizing debt and capital structure.
Deals Leader, PwC US
Deals Partner, PwC US