In an age of M&A complexity, do you pause or proceed?

By

Steve Krouskos

EY Global Vice Chair – Transaction Advisory Services

Driving growth and investment priorities for global EY TAS. University of Florida alumnus. Son, husband and father of four.

6 minute read 8 Oct 2018

M&A appetite remains robust on the whole and many companies will proceed with dealmaking plans as they look to gain competitive advantage.

This article is part of our M&A report Global Capital Confidence Barometer, 2nd half 2018.

For more than three years the Global Capital Confidence Barometer has consistently predicted heightened M&A intentions (which have been borne out with record dealmaking in the market).

The fall in corporate appetite to acquire we report in this edition is perhaps not surprising. M&A appetite remains robust on the whole and many companies will proceed with dealmaking plans as they look to gain competitive advantage.

Some companies, however, have opted to pause. They haven’t left the deal table permanently — they just want a timeout. 

Why? Two key reasons:

  1. Some will want to fully assess the changing landscape internationally and the implications before firming up future deal plans. Regulation, tariffs, NAFTA, Brexit — these are all issues creating uncertainty. Depending on their sector or location, some companies will have a greater sensitivity to how these issues are resolved. They are awaiting more clarity before they continue M&A.
  2. Some companies also need some respite to fully integrate the deals they have undertaken in the past three years. A lot of deals have been done and — as our survey shows — a number of companies have a renewed focus on ensuring deal integration delivers the right synergies and value (see our integration chapter). Sometimes a break between courses is needed to make a meal more enjoyable.

What does all this mean for the deal market? The speed of change is relentless and M&A has proven to be an effective means to move quickly to gain competitive advantage or defend against future disruptors. 

That still holds true. 

We may see fewer deals in the near term. The next 12 months will probably not be as strong as the last 12. But the M&A imperative remains and those companies opting for a dealmaking timeout now will return to the deal table at some point soon.

Key M&A findings

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Chapter 1

Corporate strategy and portfolio transformation

Heightened risks of disruption and increasing policy uncertainty accelerating portfolio reviews and potential divestitures

As external uncertainties rise, executives are increasing the frequency of their own internal portfolio analysis. 

While disruption from changing consumer preferences driven by technology is now ever present, potential changes to global trade policies are becoming an increasingly pressing issue in company boardrooms.

The pressure from investors for companies to maintain or improve both margins and payouts has intensified during the current cycle. Investors, both activist and institutional, are demanding even more during a sustained period of record profitability and corporate earnings growth.

Executives indicate they are accelerating their portfolio reviews. A critical component of this will be understanding the resilience of their current supply and operational eco-systems. This will help them to understand the potential for policy changes that may disrupt these critical chains. They will be looking to build in the agility and flexibility to adjust and pivot to respond to changes that may impact their access to suppliers and customers — even if that means reinventing their value chains to maintain business as usual.

With pressure from investors to maintain margins, companies are looking to redefine their portfolio.

Companies continue to look at their portfolios and align their strategy and growth prospects. This focus on recycling capital through divestitures may likely underpin deal flow in the next 12 to 24 months. Those companies that balance acquisitions and divestitures generally outperform those that focus solely on either acquisitions or divestitures.

This focus on recycling capital through divestitures may likely underpin deal flow in the next 12 to 24 months.

With talent hard to secure, executives are turning inside for competitive advantage.

Executives in our survey recognize that when it comes to growth and innovation, the risks and rewards associated with an organization’s talent are among the most critical areas. 

With many major economies running at near-full employment, there is a clear focus on the need to retain and motivate their existing talent.

Having a flexible, well-trained and rewarded workforce is key to an organization’s ability to capitalize on changes in customer buying patterns and emerging technology. Companies need to be able to pivot quickly in response to new technologies or competitive disruption. 

From building a culture where innovation thrives, to defining the company’s purpose, to retraining workers to meet the demands of evolving business models, a company’s people strategy is critical to competitive strength.

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Chapter 2

Key M&A takeaways

8 critical questions executives should ask themselves

Below are the critical questions executives should ask themselves to drive better M&A in today’s deal economy.

  • Global growth desynchronizes while technology and demographics alter the global economic landscape. Advanced analytics and scenario planning, as part of portfolio and strategy reviews, can help companies more quickly identify the next hot spot for growth.

  • Some companies may look to pause their dealmaking, either to integrate previously acquired assets or to reflect on geopolitical impacts on their industry. However, the M&A imperative remains. The pace of change is relentless and M&A has proven to be an effective means to move quickly to gain competitive advantage or defend against future disruptors. Those pausing may soon feel compelled to return to the deal table.

  • Both anti-trust/competition and broader industry regulations are shifting as industry ecosystems evolve. A better understanding of the new benchmarks and metrics being developed to regulate industries may give companies a competitive M&A advantage.

  • Increasing concerns about tensions between the world’s two largest economies are compelling companies to look at their own supply chains and customers. Building optionality through investments may enable companies to pivot quickly when required to protect their value chains and preserve growth.

  • The rise of private capital, including private equity, super funds and corporate venture capital, has fundamentally reshaped the funding environment. Companies should consider which funding source best suits their needs now and the capital structure best suited for their future growth.

  • Companies that invest more highly into integration either meet or exceed synergy targets. Executives need to plan integration strategies earlier and ensure they factor in the resources and costs that can optimize M&A value creation.

  • Many companies that underpin their synergy targets with monetizing technology, intellectual property or customer innovation appear disappointed with the results. But, unlike top- or bottom-line synergies, these may just take longer to achieve. Companies should incorporate these potential intangible synergies at the earliest stage of the deal process. They should also be prepared to wait a little longer to realize their targets.

  • In tight labor markets, the best candidate you are looking for could already be an employee. Companies need to focus on retaining, motivating and rewarding their existing staff.

Summary

Our latest M&A report notes that regulation, trade and tariffs may foster a deal hiatus for some, while many others move forward with acquisition plans.

About this article

By

Steve Krouskos

EY Global Vice Chair – Transaction Advisory Services

Driving growth and investment priorities for global EY TAS. University of Florida alumnus. Son, husband and father of four.