With food and beverage companies moving into the life sciences arena, chemical companies muscling in on the food and beverage industry, and technology creeping in to apparel, such disruption replaces advances in technology and digitalization, which had until now dominated the disruption discussion.
These challenges are driving executives to look at both organic and inorganic growth alternatives to remain relevant and competitive in a fast-changing market that has companies feeling competitors fast on their heels. When looking at M&A specifically, sector convergence has companies increasing their deal activity. However, the ongoing political instability may be making them more cautious in the types of deals they pursue.
Companies zero in on smaller-sized deals to remain nimble in a highly competitive, customer-driven market
This need to achieve greater competitive advantage appears to be at the heart of executives’ pursuit of viable M&A assets in the next 12 months. While the number of companies reporting five or more deals in the pipeline has more than quintupled year-over year (from 8% to 45%), consumer products and retail companies are zeroing in on smaller-sized deals, with particular emphasis on innovative start-ups and emerging assets.
Executives feel that more, smaller deals increase the likelihood of prevailing in a market where the gap between buyer and seller valuation expectations continues to creep up — a trend executives expect to continue over the next 12 months.
However, consumer products and retail companies are reluctant to pay. More than 90% of executives indicate that their company failed to complete a planned deal in the last year. Of those, 36% cite the gap between buyer and seller as the primary cause. In 2016, it was not usual to see consumer products companies drop takeover bids when the target’s price was higher than the acquirer’s appetite.
Nearly one-third (31%) suggest that economic and political instability was the second most important reason for walking away. Meanwhile, issues uncovered during due diligence and investor and board scrutiny remain concerns that executives consider when weighing the merits of a deal.
Post-Brexit, the UK falls out of favor as a destination of choice for investment
In April 2016, the UK was the top destination of choice for consumer products and retail companies. Today, the UK doesn’t even make the list. Instead, companies are focusing on other developed markets — the US, Canada, France and Germany. Consumer products and retail companies consider target assets in these regions as “safe bets” in an environment of growing volatility and uncertainty.
Top five investment destinations
Looking ahead, executives seek to balance opportunities with risk
As we look forward, we expect that consumer products and retail companies will stay disciplined in their M&A activity. Despite their enthusiasm for dealmaking, ongoing volatility and uncertainty in capital markets, a lack of visibility across the political landscape, and a widening valuation gap will continue to play a role in executives’ dealmaking decisions. We anticipate that executives will persist in pursuing opportunities that balance valuations with perceived risks, and to avoid deals that overestimate growth potential.