Creating value in deals as external forces change
March 04, 2019
Creating value in deals is the benchmark by which M&A activity is judged. As our recent Creating value beyond the deals (focussed on corporate executives’ findings*) report highlights, there are many factors which enhance that value and can help to avoid the pitfalls. They are built around being true to your strategic objectives, comprehensive in your value planning and putting culture and people at the heart of the deal.
All of these elements you can control, within reason. But what of the external factors? How do you avoid value being diluted by changes to the business landscape driven by political and other issues? In a phrase, by getting the basics right and then applying the correct political overlay to your value creation analysis. Mis-judging the impact of political change on your acquisition, or the strategy of which it is part, may corrode value more quickly than anything else going wrong with your plan.
Take Brexit. It has been a mainstay of the UK national conversation for several years now. In fact, it’s hard to find an issue that hasn’t been forecast to be affected by our planned exit from the EU. The decision in the UK is part of a bigger picture, too: elsewhere in Europe the broader backdrop of political and economic restlessness is also plain to see.
And in the US, without much warning, we’ve also seen significant changes to the business landscape in the form of recent US tax reforms. The most significant tax changes for more than three decades have incentivised a completely new pattern of investment, creating profound implications for all kinds of business activity – for the US, Europe and the UK. Add to this the current and prospective ‘trade wars’ and we can see how quickly external factors can alter value assumptions very significantly.
Many in business recognise the need to understand these external dynamics. In the UK the market is grappling with questions like; do recent currency movements make UK acquisitions more attractive to overseas parties? Or conversely, given the UK’s uncertain future trading arrangements with the rest of Europe and beyond, is divesting UK-based operations now a sensible strategy? Do share price movements post-referendum present an opportunity to acquire a company whose share price has come under pressure? And should those companies be preparing to defend a bid?
For these reasons and others, all eyes are on what actually happens on 29th March when the UK is scheduled to leave the European Union. Without indulging too much in speculative thinking, there are some observations we can make. For example, while it’s true that Brexit is making people wary, that risk hasn’t been factored into prices of deals yet. On one level that suggests we might still expect normal deal activity in 2019. However, there’s no doubt we have seen many of the more active deal doers take a wait and see approach. Like others, they recognise the risk that the markets have not necessarily factored in the short term risk of ‘no deal’ Brexit or the longer term risks of a very different UK-EU trading relationship and what that could mean for goods, services, capital and people and the value chains they are part of.
This points to a key truth: more than ever, it’s crucial to understand how external factors could affect your strategic plan and affect the value you seek through M&A. Brexit is a live case study for this approach - developing a shared understanding of what is at stake for the existing business, and possible M&A targets or divestments is essential to protect value or spot the opportunities to grow it.
So, while there is no doubt that creating value in deals depends on the approach and the fundamentals of the businesses concerned, understanding the external factors has never been more necessary.
* To help our clients unlock long-term value from the deals they are doing, we surveyed 600 senior corporate executives from a range of industries and geographies and asked about their experiences with value creation through M&A. All participants in our survey had made at least one significant acquisition and one significant divestment in the last 36 months.
In addition, a large-scale global study was conducted on the performance of corporates around the world, following an acquisition and divestment.
The survey and research were conducted by Mergermarket and Cass Business School, respectively, on behalf of PwC.
In this report, we outline the key findings, discuss their implications and share our insights on how to further advance and refine the way you approach value creation within your own organisation.