Seven ways to win when deal fever sets in

After a sharp drop in deals at the outbreak of the pandemic, Q3 of 2020 was the busiest on record for deals worth $5bn or more, according to data from Refinitiv. But under pressure to complete, not all of these deals will create the value they anticipate.

As our colleague, Global Value Creation Leader, Hein Marais, pointed out, there are various reasons for the current activity – from the need for rapid strategic change or acquiring new capabilities to divesting non-core parts of the business or raising cash quickly. And there is plenty of money available to fund activity – private equity groups in particular have a healthy stockpile of funds and are looking to invest.

We know that the best performing deals have a sound strategic basis. So with unclear trend data from the impact of COVID-19, and the increased pressure to complete deals quickly, how can businesses keep their heads and navigate the frenzy that’s ahead?

Here are our top tips:

• Look at your portfolio strategically. Understand what you need to buy or sell, and why. What has changed? Where does the business need to be to succeed in the medium term?
• If you’re looking for growth, where can you acquire to reshape your business? What will act as a catalyst for growth and what capabilities are required?
• Think about what drives the performance of the business, as opposed to GDP and other macro drivers? How might these drivers change in the future? What levers do you as a management team have at your disposal? For example, the perceived value of recurring revenue has risen since the pandemic – a business with stable revenue will attract a higher valuation.
• But also look beyond growth – ESG credentials are becoming more important to investors, as is resilience to factors beyond EBITDA. Private equity (PE) is increasingly looking at transformational deals; through a move to cloud computing, driving industry consolidation or changing the business model.
• Think like private equity. Be deal-ready at all times, and consider how a PE buyer would look at the business. PE would put value creation first – so develop a value creation plan, whether there are any immediate plans for a deal or not.
• Carry out detailed scenario planning and regular stress testing. Work thorough every conceivable option, however unlikely, and plan ahead, adjusting for new data as it comes in.
• Put value at the heart of the deal. Only 61% of buyers believe that their last acquisition created value – and if they could repeat the experience, two-thirds said that they would make value creation the top priority.

Keeping a cool head when others might be losing theirs will be essential in the months ahead. This will be a deals-led recovery, but not all deals are equal.

See what else we discussed in our ‘What’s next for deal making in the coming year’ recorded discussion with FT Live.