March 12, 2019
By Patrick Gordon, US Value Creation Leader
The pace of mergers and acquisitions continues at a steady clip, and with valuations and multiples still high, dealmakers face increasing pressure to deliver more value from each transaction. Yet achieving anticipated value remains a challenge for many deals.
In Creating Value Beyond the Deal, a comprehensive global survey by PwC and Mergermarket, 31% of respondents in the US said that their last acquisitions they were involved with created little to no value relative to purchase price. In addition, 58% of US respondents said divestitures generated marginal value at best.
The new report sought to uncover what makes deals succeed, discuss the pitfalls of those that don’t and help buyers avoid those mistakes. Here are some of the main insights:
Cementing a deals strategy – not only for a transaction but for how it will augment corporate growth strategy – emerged as a foundational key to a successful deal.
“From the get-go, strategy has to be right,” says Bob Saada, US Deals Leader at PwC. “Deals that deliver value don’t happen by accident. Transactions should be an extension of your corporate strategy instead of a sudden opportunity. Companies that invest time in strategy, follow that course and avoid chasing a shiny object just because it’s available will have a much better path to success.”
Most respondents said that deals in the US were driven by strategic portfolio reviews, with 82% saying that of acquisitions and 77% of divestitures. These proved to include most of the deals that created significant value. After the strategic review, companies diversified their products or offerings, or they acquired technology – the top two most cited reasons for deals, with 40% of respondents pinpointing those factors. Half of US divestitures stemmed from strategic reviews that were aimed at raising funds for other corporate purposes or to reduce exposure for macroeconomic or geopolitical reasons. Opportunistic transactions – those done without the rigorous strategic planning – can create value, but they do so far less frequently than deals based on strategic thinking.
The survey revealed room for improvement in the strategic review process that could have helped companies create more value in deals. Between half and three-quarters of respondents cited the following areas as where their process could be improved: developing an actionable value creation plan, pre-deal assessment and validating their pre-deal hypothesis. And 57% said they needed more help in identifying a target that met a strategic need.
Another key insight: the significant correlation between deal success and companies that prioritize value creation from the onset.
Successful buyers not only are doing sophisticated diligence and examining value creation opportunities more deeply than those simply conducting financial and tax due diligence. They’re also doing so early in the process. How early? Some are thinking and planning value creation pre-deal, trying to validate that the deal will align with their strategic imperatives.
“In today’s market, prices are rich, valuations are high and you usually have to pay a premium to acquire a good business,” says Brian Levy, Global Deals Industries Leader at PwC. “In the best deals I’ve seen, my clients had been in discussion with the target company for years before the deal came to market, and they know the business well.”
Companies that overtly prioritize value creation, rather than assuming it will happen as a natural consequence of transactional activities, have a better track record of value-accretive deals. But 77% of US respondents said acquisitions they were involved with had moderate or significant room for improvement in developing an actionable value creation plan; almost a quarter said there was significant room for improvement. More than half said the same for pre-deal assessment, and 73% said it for validating their pre-deal hypothesis.
A raft of issues also emerged during the due diligence process. More than two-thirds said they saw moderate or significant room for improvement in due diligence with regards to operations, technology and IP, tax, and legal issues.
Don’t delay on integration
Surprisingly, the survey revealed that many businesses simply overlooked, if not ignored, integration and didn’t devote the resources necessary to create value successfully and at speed. Among US respondents, 43% said they spent 5% or less of the total value of the deal on integration.
“Integration and integration strategy have to be in lockstep with the acquisition strategy, and the integration strategy needs to be done as early as possible,” says Gregg Nahass, US and Global M&A Integration Leader, PwC Deals. “If you don’t have the integration strategy right at the outset, how do you know that the deal is actually going to be something that you can execute on?”
In addition to focusing on creating value right from the start, successful acquirers devote significant resources – including talent and expertise – to ensure that value is realized as quickly as possible. Less successful deals are characterized by misaligned priorities on Day One of the transaction, as well as under-resourced planning and implementation.
Most US executives said more progress is possible in a broad array of integration issues. Moderate or significant room for improvement in Day One readiness was cited by 86%; about three out of four said the same for a long list of issues, including integration planning, communication with key stakeholders, managing customer and market expectations, and optimizing tax, legal and financial benefits.
Part of the reason why companies see such broad and significant room for improvement could be due to their focus on cost savings. “Eliminating costs is what I would describe more as value capture versus value creation,” Nahass says. “Value creation to me tends to be more around revenue-generating, revenue-sustaining and market-growth types of activities … and you’ve got to set a plan in place to decide what you’re going to do with your market products and channels and what you’re acquiring as well as the sales force.”
Almost two-thirds of US respondents said that the deals they were involved in delivered on cost savings. Yet fewer than half said their deals delivered value creation through revenue synergies.
Dealing with divestitures
The survey revealed that divestitures can pose challenges. More than half of US respondents said their divestitures created little to no value or lost value relative to the value the business would have created had it not been sold.
Divestitures sometimes are forced on a company, perhaps through shareholder activism or antitrust regulation enforcement. As a result, not all companies have the in-house ability, skills or experience to plan for such a transaction in advance, which makes creating value even more challenging.
Almost seven in 10 US respondents said successful divestments – like acquisitions – followed a strategic portfolio review. And experience matters: 66% of those who said that their last divestment lost significant value also don’t have a divestment in a typical year.
With a heated M&A environment and amid a disruptive landscape, we all recognize that value creation in deals is crucial. Creating Value Beyond the Deal is full of insights gleaned from hundreds of corporations – big and small, serial acquirers and novices – about the best practices they deployed to deliver anticipated value.