Three key considerations when making deals in a fast-forward world

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Amid all the challenges of the past several months, corporate and private investor appetite for deals has remained strong, and that doesn’t appear to be changing anytime soon. We expected M&A to be resilient during a recession and deal activity to recover faster than the economy, but the pace and magnitude still are remarkable given the turmoil of the COVID-19 crisis. For instance, US deal value in Q1 2021 was the highest ever, according to a PwC analysis of Definitive data, and the 34 megadeals (transactions of at least $5 billion) were the most in several years.

So what’s next? In our latest CEO survey, 57% of the US executives responding told us their companies plan to increase M&A investment in 2021. Where should they focus their efforts in this still-uncertain climate? To help answer that question, Fareed Zakaria—host of CNN’s “GPS” program and author of Ten Lessons from a Post-Pandemic World—joined our recent Deals Exchange for a conversation on deal making in a fast-forward world.

Fareed noted that the pandemic has been broader and deeper than other recent crises, and that the past year has amplified and accelerated many geopolitical, economic, regulatory and social challenges. Many of these challenges can influence deal strategies and the work it takes to ensure deals generate the value you expect. Talking with Fareed and our clients, I was struck by three things that I think will be critical for those considering deals in the years ahead.

  • Accountability and advocacy: The pandemic created a heightened sense of fairness and unfairness, Fareed said, and it gave people time to reflect on what’s important to them, including as customers and employees. When it comes to deals, assessing financial statements, facilities and other traditional elements is still important, but as Fareed noted, companies are made up of human beings. Environmental, social and governance (ESG) initiatives are an increasing part of deal value, whether it’s a well-known corporation trying to preserve favorable brands or a private equity firm looking for higher returns when selling a portfolio company.
  • Agility: First, the digital economy has been supercharged by the COVID-19 crisis as consumption and connectivity shifted significantly over the past year. One example is telehealth: The number of virtual visits in 2020 was equal to what was projected for 2035, Fareed said. Such shifts mean companies should be nimbler with tech investment and consider how their digital capabilities will be evaluated in deals. Second, geopolitical tensions are testing strategies for increasing efficiency and growth. The world is more open, Fareed said, but with that openness comes more volatility and the need for more resilience. In addition to supply chain disruption and trade disputes, companies considering cross-border M&A and other foreign investment should determine how much the quality of a government—versus market size, labor costs and other traditional factors—matters when it comes to realizing value.
  • Ambition: The pandemic brought on a lot of tension, but I echo Fareed’s belief that countries and companies in general are looking for growth. I also agree with his observation that the US has always been a place teeming with ambition—from the moon landing in 1969 to the creation of the internet to the historically rapid development of COVID-19 vaccines. A crisis often drives major change, and this is when companies should consider all of their paths to growth.
  • The competition for assets can be fierce in the current climate, and the right deal may not necessarily be M&A. It could be a strategic divestiture that provides substantial capital for reinvestment in a core capability or a partnership with a company in an adjacent sector. Whatever the route, companies that learn from the past year and recognize what’s fundamentally different now will have a better chance of making deals that deliver value.

Source : Colin Wittmer

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