Dealmaking is set for a very strong 2017, and concerns about an overheated market are countered by growing deal discipline.
Near-term dealmaking is expected to remain at high levels
Although 2016 M&A did not top 2015’s record levels, a strong finish to the year and a flurry of dealmaking in early 2017 are fueling executives’ positive M&A intentions.
Improving economic conditions underpin deal activity. European M&A markets, in particular, have seen a strong start to 2017 as European companies on the buy side return to the market. This trend, together with private equity (PE) firms shifting into portfolio-replenishment mode, should keep deal values and volumes robust for the remainder of the year.
Q: Do you expect your company to actively pursue mergers and acquisitions in the next 12 months?
Deal momentum grows despite head winds
Many of the head winds that caused a slow start to dealmaking in 2016 have dissipated. New geopolitical complexities have emerged in 2017 — but we may be witnessing a new kind of M&A market, where these geopolitical concerns might not derail deals, unlike in previous cycles.
Moreover, there has been no change in the underlying reasons for pursuing deals: digital disruption, sector blurring, and changing consumer and customer behavior. More than ever, companies that hold back from inorganic growth strategies could struggle to remain relevant in a fast-moving environment.
Q: What is your expectation for the M&A market in the next 12 months?
Executives plan to complete more deals while replenishing their pipelines to enable a range of options
The M&A upturn that began in 2013 looks set to continue, as executives plan to sustain or accelerate deal completions. Improved economic conditions are a major factor, but other pressures mentioned in this report are also bringing companies to the deal table.
Q: Considering the next 12 months, what is your expectation for the number of deal completions by your company compared with the past 12 months?
Among the many factors influencing pipeline growth is executives’ need to consider multiple futures for their industries at a time of continuous disruption. In these markets, building optionality into corporate strategies could be the key determinant of success.
Companies are reacting and responding to disruption by following the customer
Accelerating innovation is compelling companies to look outside their own sector to protect and enhance their customer base in an increasingly competitive environment.
Customer-centric strategies are driving investment strategies. Executives recognize that they need to at least maintain pace with changing customer trends or ideally get ahead of the pace of change.
That could lead to cross-sector convergence in the search for customer-centric innovations, which brings both risks and opportunities. Companies may find themselves entering into transactions and alliances very different from those they would have considered in the past — with all of the integration and business-focus challenges that come with such ventures.
However, the market imperative remains compelling, especially as competitors innovate their own products and engage customers in new and innovative ways. The need to maintain a leading competitive market position is critical to protecting earnings and margins.
Q: What are your main strategic drivers for pursuing an acquisition, joint venture or alliance outside your own sector?
Executives are attracted to alliances for their lower risk, relative speed and expanded optionality
Positive sentiment on economic outlook signals the next phase of the global economy and presents great opportunities. But it also presents new risks — the fast pace of change compels executives to prepare for multiple futures, which means building flexibility into strategic plans. Such flexibility can be achieved effectively through alliances and JVs.
In fact, alliances have taken on a wider, more varied array of structures, driven by the emerging trend of larger companies deploying capital through corporate venture arms. In many cases, these kinds of investments become more formalized later, leading to full takeovers.
Alliances compel, and may require, different methods for evaluating success
The majority of executives recognize that alliances, as business combinations, are very different from mergers, acquisitions and even JVs. Accordingly, the level of oversight for alliances must also be different. Companies should employ diverse integration and management methodologies so that these arrangements generate value and bolster long-term strategic plans.
Companies are looking across a broad range of geographies for deals to secure market access and grow their customer base, with a pivot toward developed markets
Cross-border transactions have emerged as a primary component of dealmaking in the current M&A market. During the first quarter of 2017, more than 40% of value was allocated to buying assets abroad. The key shift has been a resurgence of deals between the US and Western Europe, which is reflected in our survey.
As executives place greater focus on North America and anticipate a pickup in US economic activity, companies are looking to tap into this higher growth to boost earnings. Meanwhile, Western European assets will also be in demand, as indicators point to the region finally escaping a decade of stagnation.
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Executives look to new types of diligence to make sure the right deals are struck
This survey finds due diligence coming to the fore, as executives utilize new tools and methodologies to better understand the assets they are intending to acquire.
Data has exploded at an astonishing rate in both volume and velocity in recent years. Companies now need advanced analytics to efficiently harness leading insights.
There are two key reasons why due diligence is elevated as a deal filter in current dealmaking. First, digital technology is increasingly disrupting business models and markets. Understanding the impact of digital shifts on market share, margins and growth of a targeted asset is crucial. Second, the pure availability of data has increased. Data has exploded at an astonishing rate in both volume and velocity in recent years. Companies now need advanced analytics to efficiently harness leading insights.
More companies than ever are using data analytics to deliver fast and high-quality analysis using unstructured data sets during the diligence phase of deals. Identifying issues that were previously hidden is enabling companies to ask better questions prior to completion. This helps executives find better answers and in turn make better valuation and transaction decisions.
Companies are also using advanced diligence techniques to understand how acquired assets can be successfully integrated into their organization and strategy. Integration strategies now need to be tailored to deliver back-office synergies and to enhance front-end customer experiences. Tailored integration also helps companies capture the full potential of future growth.