Right from the start: Making M&A pay in a bumpy 2019

February 01, 2019

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by Marissa Thomas Head of Deals, PwC United Kingdom

Email +44(0)7739 812746

by Nick George Strategy Partner, UK Transaction Services TMT Industry Leader , PwC United Kingdom

Email +44 (0)7909 680182

by Chiara Lombardi Director, Portfolio Advisory Group, PwC United Kingdom

Email +44 (0)7557 050155

Amid considerable political uncertainty and economic headwinds, it’s vital to get your acquisition rationale, execution and value delivery right from the start.

With a big jump in business leaders anticipating a downturn in the global economy and a dip in confidence about their organisation’s own growth prospects over the next 12 months, PwC’s latest Global CEO Survey points to a more cautious outlook than 2018. Will these sentiments be reflected in the outlook for M&A in the UK?

Globally, the proportion of CEOs who are planning M&A to drive growth over the next 12 months has fallen since last year, but only marginally (37% in 2019 from 42% in 2018). There is also significant variation between sectors, with some such as entertainment and media seeing a rise, reflecting a realisation that some consolidation may be needed in the face of tech disruption and competition from new entrants.

Looking at the UK specifically, while the deal count was slightly down in 2018 (especially in the final quarter), 2018 deal values were sustained by megadeals in sectors such as consumer, pharma and media.

Securing the payback

Amid the market uncertainty, the big challenge in 2019 remains how to secure a sufficient post-deal return to justify the transaction. This is a market with no margin for error.

This underlines the importance of developing a clear M&A blueprint as early as possible in the process. A robust plan would identify what capabilities are needed to deliver on your strategy ambitions and how.

Scale will continue to be important. But as you look for transformation opportunities, the deal levers might also be specific technologies, particular types of talent or gateways into a new market.

The blueprint shouldn’t just include the targets, but who within your organisation would need to do what and when across the deal lifecycle, from quantifying the uplift through to integration and value realisation.

What if your deal was different?

This month, we’ll be launching the findings from joint research with Mergermarket into how the most successful companies boost returns from M&A by uncovering hidden value at every stage of the deal. You can register now to be the first to receive our findings.

With initial findings showing that just 20% of global acquisitions achieve transformative deal value, the question is how can you make sure your deal is different? The research also shows that some sectors are doing better than others –Telecoms, Media and Technology and Industrial Products and Services show the best return performance after acquisitions.

Pressure to put funds to work

As we’ve moved into 2019, uncertainty about the outcome of Brexit, tariff disputes and the direction of UK government policy does appear to be weighing on inward and in-country investor sentiment. We are seeing some delays and failures in deal execution as a result of market uncertainty. But the pressure on PE firms to put their funds to work means that the acquisition flow will continue; and while the five-year rise in multiples may slow, prices will remain high.

Re-assessing drivers of value

Businesses need to modernise and grow. Technology is critical in a marketplace that offers opportunities for business model transformation on the one side and disruptive threats to slow-moving businesses on the other. FinTech and other innovative start-ups will therefore continue to be a prime acquisition target, though the multiples tend to be especially high. And as our CEO Survey highlights, acquiring talent could be as big a driver for M&A as technology, with a high proportion of CEOs believing that skills shortages are impeding innovation, customer service and growth.

Steering through Brexit

Will Brexit uncertainty hold up M&A? Our CEO Survey shows that the proportion of overseas business leaders targeting the UK for investment has fallen, but some sectors such as financial services are bucking the trend. There are also signs that Chinese investors are switching their focus from the US to Europe, with the UK very much on the radar. As long as businesses have faith in their expansion plans, acquisition will continue to be a key part of their strategy.

by Marissa Thomas Head of Deals, PwC United Kingdom

Email +44(0)7739 812746

by Nick George Strategy Partner, UK Transaction Services TMT Industry Leader , PwC United Kingdom

Email +44 (0)7909 680182

by Chiara Lombardi Director, Portfolio Advisory Group, PwC United Kingdom

Email +44 (0)7557 050155