Why an M&A-style value creation approach is more important than ever
July 09, 2020
Just six months ago it was largely business as usual in the world of deals. While activity was beginning to slow by the end of the year, 2019 saw the completion of some huge transactions. 35% of global CEOs, according to our annual CEO survey, were planning to grow their organisation through at least one merger or acquisition during 2020. And then everything changed.
The impact of COVID-19 has ravaged the value of many businesses. Demand has been disrupted (at best) and destroyed (at worst); supply chains have been interrupted. Some companies are facing an existential crisis – many, many more have seen a significant ‘value gap’ open up in terms of pre- and post-pandemic value.
The priority for many companies in the initial weeks of the crisis was simply to survive – in practice this meant managing liquidity, accessing any government support and other funding that was available, and restructuring the balance sheet to preserve value - the Repair phase. While deal activity fell during the initial weeks of the pandemic, some of the few that went ahead, such as the $450m investment in Airbnb by TPG Capital Management and Sequoia Capital, were driven by the need to plug a COVID-19-instigated capital gap in an otherwise viable business.
There will be other companies in a similar position and we’re expecting to see deals activity rising sharply in the coming months, driven by powerful short-term pressures:
- Many businesses will face a pressing need to raise cash, even if that means selling a profitable core business
- Corporates will divest from areas of the business they can no longer justify and focus on their strongest business lines
- Deals will be negotiated between companies who see the potential for synergies or believe that they will be stronger together
- Companies will seek deals in order to strengthen, rebuild or protect their supply chain, or to acquire capabilities (particularly tech capabilities) that they need to succeed in the new normal
- Cash-rich private equity funds and corporates with strong balance sheets will actively pursue opportunities
- Large stock market falls could trigger Public-to-Private deals.
Maximising deal value in a changed market environment
As organisations seek ways to prevent further value destruction and plug the potential/inevitable ‘value gap’ created by the impact of COVID-19, the compulsion to find and complete the right deal quickly will be intense, particularly in those sectors that have been hardest hit by the pandemic. But that doesn’t mean that dealmakers should take their eye off the need to maximise value creation.
For those looking to seize an opportunity to acquire a business or, conversely, to raise capital through a disposal, the temptation to rush through the process just heightens the potential to strike a poor deal. One that doesn’t reap or create its full value potential. In some cases, for those seeking to raise capital, a poorly planned or delivered deal could be the difference between survival and collapse, emerging out of this crisis or not.
In recent years, when multiples were high, creating value from deals became increasingly challenging. In 2018, just 61% of acquiring companies could say that their latest acquisition created value, and only one in five said that it created significant value.
There is a strong argument that multiples will fall in the post-COVID-19 world, as the power shifts from sellers to discerning buyers. But it would be a mistake to assume that, as a consequence, value will be created automatically. We must maintain our emphasis on deliberate value creation both in and beyond the deal. There’s no doubt in my mind that in the coming months and years clear value creation planning should be an absolute priority, whatever the situation or motive for the deal.
It’s also critical to acknowledge that the world has changed and that businesses are emerging into a transformed landscape. As I’ll explain in my next blog, deals strategy should not be about getting the businesses back to where it was before COVID 19 – it should recognise that the way the business relates to its customers and generates its profits has changed. Creating value in deals in this radically different future will take careful thought and analysis – and a proactive value creation plan.