Maximising M&A and divestment value webcast: Key takeaways from the panel discussions and Q&A
August 08, 2018
Deal volumes are rising, and acquisition prices even more rapidly. The result? You have to work harder to make the deal ‘pay’. During July’s live webcast, our M&A experts explored the key H1 2018 trends, shared their perspectives on how to boost M&A returns and responded to a range of questions from viewers. We were also joined by Mergermarket, who discussed the state of play in M&A so far.
Our panellists included:
- Novella De Renzo, PwC Tax Partner
- Hein Marais, PwC Value Creation in Deals Partner
- Nick George, PwC Strategy& Partner
- John West, Mergermarket and Dealreporter EMEA Managing Editor
The M&A state of play
The webcast began with a discussion around the first six months of 2018 and what was driving the 60% year-on-year rise in global deal values. The surge not only reflects businesses’ ongoing desire to strengthen scale and market reach, but also acquire the talent and technology that will enable them to ride the wave of disruption.
The healthcare sector is at the forefront of moves to acquire transformational technology, with year-on-year deal values doubling in H1 2018. A prominent example is Novartis’ purchase of gene therapy business, AveXis.
The tech and internet giants are also pursuing game-changing megadeals. Recent examples include Microsoft’s takeover of the software development platform, GitHub. While smaller businesses are also looking to M&A to beef up their technological capabilities, they risk being priced out of the market when the funds at the tech giants’ disposal are so vast.
It was said that the other defining feature of 2018 is value defence as businesses seek to safeguard value chains in the face of protectionism and trade disputes. This is reflected in more than a trillion dollars of domestic in-country acquisition in H1.
Raising the bar - creating value where others don’t see it
Are deals delivering? Part of the continuing research we are carrying out with Mergermarket focuses on the performance of both buyers and sellers following M&A transactions. After 12 months, acquirers outperform their peers by an average of around 5% , though this slips back in line with peers after 24 months. Divesting companies actually underperform their peers after a year and this worsens after 24 months.
For acquirers, rising prices are heightening the challenges of delivering deal value – average acquisition multiples are up by almost 30% since 2010. Buyers therefore have to work harder to make M&A pay. Once reliable sources of deal value generation are also being squeezed. This includes new curbs on the amount of net interest on leveraged debt that can be deducted from profits.
Overcoming these challenges demands a clear strategic blueprint, which sets out where the company wants to be, the levers of value needed to get there and how it intends to build, buy and hire them. The value levers include talent and technology that would enable the business to stimulate innovation or tap into new revenue streams. And with the impact of tax reform not only affecting tax liabilities but also the structure and operations of the business, tax considerations should be built into the strategic blueprint from the outset.
With many of today’s targets likely to be relatively new or unfamiliar types of businesses, it’s important to ensure that acquirers have people with the skills and experience to know what they’re buying and whether they’re paying the right price. These include people with tech expertise and an understanding of emerging trends. They also include those with a track record of overseeing complex acquisition and divestment, an important source of which is likely to be Non-Executive Directors.
In relation to divestment, the value slip following divestment often stems from a lack of management focus and strategic alignment. Our research also highlights the complexities of carve-out and resulting pressure on areas of the business such as IT, HR and pensions. This not only underlines the importance of more effective separation planning, but also a clearly articulated strategic plan for the retained business and why that’s appealing for shareholders.
The challenges ahead
The question and answer session highlighted some of the challenges ahead and how to tackle them:
1. What are the prospects for and implications of further acquisition of non-tech businesses by technology and internet groups?
If we take Amazon as an example, there’s still considerable room to build market share in territories where the group has a limited footprint. Yet, its acquisition strategy may go beyond head-to-head competition with established businesses. For example, Amazon’s purchase of Whole Foods could be as much about gaining insights into the purchasing habits of the organic retailer’s upmarket customer base as a full drive into the supermarket sector. The big question for competitors is how Amazon will use these insights and what new business models could emerge as a result.
2. How can businesses future-proof themselves against disruptive new entrants?
Established players are accelerating consolidation and vertical integration in response to the inroads being made by new entrants into their markets – the tie-ups within the entertainment and media sector are a clear case in point. Others are opting for collaboration. Examples include Ryman, a more than century old UK stationer, which now sells products through the Amazon marketplace, as well as its bricks and mortar outlets.
3. How will Brexit and associated uncertainty over market access affect M&A?
Both open and more limited market access scenarios are likely to fuel acquisition flows. Relatively free market access and the greater certainty that would come with it would encourage a pick-up in investment. At the other end of the spectrum, any barriers to cross-border trade would spur more companies to acquire platforms within the EU or promote defensive in-country consolidation. At the same time, groups still need to grow whatever happens between the UK and EU. As long as businesses have faith in their expansion plans, cross-border acquisition will continue to be a key part of them.
Dealing with the new M&A dynamics
So, this is a deal market with huge potential, but also new and challenging dynamics. In the autumn, we’ll be publishing more of the findings from PwC/Mergermarket research. This includes exploring how the most successful corporates and private equity firms approach value creation throughout a deal.