Deals, spanning from mergers and acquisitions to divestitures, can be key to driving businesses forward and in new directions. Deals inherently come with varying levels of risk and reward. If your company is considering an IPO, acquisition, divestiture or joint venture or alliance, your board of directors can play an important oversight role throughout the process.
The board oversees the consideration, pursuit, and execution of deals. In fact, the board must carefully weigh all opportunities to buy or sell as part of its routine corporate oversight. Corporate directors are well positioned to help management think through the benefits and hurdles involved in a potential deal.
PwC's Governance Insights Center has teamed with PwC's Deals to write The board's guide to deals, a six-part series which tackles a range of deal opportunities that boards should be prepared to oversee.
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, with few big changes in how people live and work.
While the economy has been upended, a majority of companies aren’t changing their M&A strategy as a result of the crisis. Deal activity has declined so far in 2020, but many companies are in 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.
Typically, businesses, industries and the economy as a whole run in cycles. Any company can become susceptible to financial distress at some point. A lengthy economic downturn can affect consumer cyclicals such as automotive, housing, entertainment and retail. New technology may fundamentally change the relationship between certain businesses and their customers. Companies may also face unique existential threats brought on by regulatory changes, senior management turnover or increased competitive pressures.
Directors need to recognize that even a seemingly healthy company could, at some point, face liquidity challenges or even total dissolution. And so directors and management must be prepared to deal with rapidly changing circumstances that could lead to financial distress.
Ensuring that the company is well-prepared can be difficult for directors, especially since they aren’t managing the day-to-day operations at the company. And unless there are obvious fires to put out, executives may not want to admit to their board—or to themselves—that their company soon could be struggling.
Focusing on growth is a given when it comes to increasing value for a company’s investors. That can mean exploring an acquisition or a strategic alliance—actions that expand the organization’s reach. But a divestiture could also help boost returns for shareholders, or improve sagging company performance. In fact, many shareholder activism campaigns have urged selling parts of companies as a way to unlock value.
Divestitures can be challenging. A company must identify the business units to be separated, decide on the type of separation, and either develop a standalone operating model and cost structure for that business or prepare it for sale. While these steps may seem straightforward, a divestiture ultimately is a surgical procedure, with a degree of complexity that demands careful planning and caution.
When a company has identified a business or division that doesn’t fit its overall strategy or could pursue new opportunities as a separate entity, it raises important questions for the board.
Strategic alliances and joint ventures (JVs) hold a unique place in the deal universe. Unlike an acquisition that adds a business or a divestiture that eliminates one, an alliance or joint venture allows two or more companies to pursue a shared goal while continuing to operate the other parts of their businesses independently.
Similar to mergers and acquisitions, alliances and JVs can be integral to a company’s growth strategy. In considering an alliance, the board should know the broader deal landscape, including market trends and recent actions by competitors. Directors also should have a clear view of their company’s overall growth strategy and be able to ask management, “Why are we doing this, and can we achieve more success in a different way?”
Making an acquisition is a major step for a company. For all the possible benefits, however, there are many challenges that can derail a deal and destroy the anticipated shareholder value. Navigating those pitfalls is vital to an acquisition delivering on its potential. Here are the steps boards should take at each stage of an acquisition.
The global pandemic and economic recession are changing the M&A environment. But that shouldn’t scare companies away from considering acquisitions and potentially divestitures. Careful oversight and smart questions from the board of directors can help. PwC partners Paul DeNicola and Carina Markel shed light on this important topic.
What questions should boards be asking about acquisitions and potentially divestitures?