May 24, 2017
Following last year’s ups and downs, 2017 remains unsettled as we near the halfway point. The once-surging stock market has leveled off. A presidential administration with more business executives than arguably any in recent history has yet to make sweeping regulatory changes. Questions persist about how the changing relationships between the US and other nations could affect the global economy.
This no doubt has caused uncertainty in some circles. In January, we shared PwC’s annual survey of business executives and their thoughts on the deals landscape in the year ahead. A few months later, it’s worth reviewing those responses and considering how they may have changed – slightly or significantly – since then.
The appetite for deals
In PwC’s 2017 US CEO Survey, many US executives were bullish about growth prospects over the next year: 39% said they were very confident they’ll achieve revenue growth. The long term was even more positive, with 56% very confident in revenue growth over the next three years.
Part of this confidence may have come from the potential for deals. More than half of US CEOs (55%) are planning on new M&A to help drive corporate growth or profitability this year, up from 46% a year ago.
Cash, collaboration and cutting ties
At the start of the year, hopes were high for a rollback of regulations, which could reduce deal costs. But the ongoing debate over repealing the Affordable Care Act and questions about how quickly or easily tax reform will be addressed are starting to shift sentiment.
Tax reform is likely to play an important role in the deals market – specifically proposals to uncork an estimated $2 trillion in foreign earnings held overseas. Repatriating some of those dollars could boost the potential for M&A, especially as more companies explore deals that could transform their businesses.
Collaboration among companies also could spur growth. Forty-five percent of US CEOs plan on new strategic alliances or joint ventures this year, and 28% percent also plan to collaborate with entrepreneurs or startups. Strategic partnerships have traditionally helped businesses gain access to geographic markets, customers or talent. Lately, though, we’re seeing companies use alliances to expand into other industries, acquire new technology or intellectual property, and strengthen their innovation capabilities overall.
In other cases, divestitures can be a potential path to more profitability, with 27% of US CEOs planning to sell a piece of their business or exit a market this year. That’s higher than in each of the two previous CEO surveys, and it may recognize that there could be more acquirers out there in the months ahead. A divestiture also can allow a company to bring in capital that helps build other capabilities, ultimately providing a different way to grow.
Deal flow to and from the US
The US remains a top market for CEOs globally. More non-US CEOs ranked this market as a top three in importance for their business growth this year than any other market. That suggested a strong likelihood of more cross-border deals, but more recent events could temper those expectations. Consider the scaling back by Chinese buyers after that country’s regulators voiced concerns about due diligence and the impact on Chinese currency.
Of course, one big question on many people’s minds is the federal government’s approach to trade policy. The withdrawal from the Trans-Pacific Partnership and talk in general of new tariffs understandably brings anxiety. The dramatic scenarios imagine a replay of the Smoot-Hawley tariff in 1930, which was intended to support US companies amid foreign competition but led to retaliation by other nations and greatly reduced both imports and exports.
But let’s remember what happened with Japan in the 1970s and ‘80s. As post-World War II industrial production surged, the success of Japanese exports created a backlash in other countries, including the US. Many Japanese companies adapted, however, and ultimately looked for deal opportunities in the US. That dynamic certainly is possible today with other nations.
Building strength through deals
Deals continue to be an area where some US CEOs want their companies to be stronger. While only 10% of CEO Survey respondents said they wanted most to strengthen M&A and partnerships to capitalize on new opportunities, it’s interesting to see what options ranked higher and how they and M&A aren’t mutually exclusive.
For instance, CEOs also said they wanted to strengthen innovation and digital or technological capabilities within their companies. Without question, M&A, alliances and other deals have been a proven way to gain access to new or different technology. In fact, we see this even more than before, thanks in large part to non-technology companies pursuing deals with technology companies. Think of automakers buying software companies as they develop self-driving cars.
CEOs also chose human capital as an area to get stronger, and we’ve seen deals accomplish that very thing. In some cases, companies acquire personnel with different skills, which can reduce the need for training or competing for outside talent. In other cases, an alliance with a widely-praised brand can generate more energy among the broader workforce. Even a divestiture can help with human capital; removing a piece of the company that doesn’t fit could increase focus among the remaining employees and finance new resources dedicated to core capabilities needed for growth.
In short, I won’t be surprised if more companies use deals to strengthen other critical areas. While 2017 got off to a somewhat slow start overall, there’s still the potential for more deal activity as companies consider both cross-border and cross-industry opportunities in the months ahead.