July 11, 2019
By John Potter, US Deals Sector Leader
Anyone who says summer is slow for business isn’t watching M&A, and big deals in particular. The ongoing pursuit of large targets has kept the amount of money going to deals high. While overall US M&A volume may be lagging compared to record numbers in 2017 and 2018, total US deal value and the number of megadeals – transactions of at least $5 billion in value – were up in the first half of 2019 following a dip in the second half of last year. And with deal volume still at healthy levels historically, the appetite for acquisitions that can spur business growth is apparent among buyers within and outside the US.
No industry seems to be able to avoid a megadeal for long these days. The energy sector followed a slow first quarter of 2019 with heated competition that resulted in a $38 billion deal – the industry’s largest in four years. Industrial products also was quiet before a June merger announcement that would create an aerospace and defense giant with $74 billion in annual sales. Technology had seen mostly smaller deals. Then came a nearly $16 billion acquisition of a data visualization company. And pharma continued its run of megadeals with a $63 billion deal – the industry’s second-largest of the year – just before the end of Q2 2019.
This activity hasn’t been without hiccups. One potential automotive merger is currently off the table, and a telecom megadeal faces antitrust questions. In addition, shareholders have challenged some of the above transactions, and other announcements initially met with tepid investor response. Neither reaction is new in the M&A world, especially when it comes to megadeals. Yet they’re still something companies must navigate in closing a transaction.
What’s driving these aggressive acquisitions? Most buyers need two things to pursue a deal: willingness (growth strategy) and ability (adequate capital). Both aspects are strong in the market right now, and even with high valuations for many targets, companies see opportunities to increase scale through substantial investments. Witness the megadeals this year involving payments companies, with financial services firms trying to reach more customers amid a boom in online transactions.
Just as much as improving shareholder returns, these deals are about companies developing deeper customer relationships and ultimately providing a richer customer experience. We’ve seen this in other sectors; media and telecom had a wave of megadeals in 2018, and those acquirers are now focused on rolling out the benefits to customers this year and next.
US consumers see opportunities in M&A
In the recent PwC report CX in M&A, US consumers generally voiced stronger feelings than those globally on the impact of deals on customer experience – both risks and opportunities. Along with their opinions on M&A, the 1,300 US survey respondents – people 18 or older from across the country, with a range of income, education and employment – shared their actual experiences as customers of companies that went through deals.
Their responses revealed opportunities for companies considering deals, starting with the recognition that a majority of consumers see M&A as positive for customers, but not as much as for the companies themselves. The gap between companies and customers is particularly notable among US consumers.
In addition, a larger percentage of US consumers versus global said companies usually don’t think about how customers are affected, and a smaller percentage said customers often benefit from M&A. While 45% of non-US consumers said they’d be skeptical of the acquisition of a company of which they were a customer, that number jumped to 52% in the US. M&A also raised overall trust issues more among US consumers than others.
US consumers reported more experience with M&A; 70% had been customers of companies that went through deals, compared to 60% of non-US respondents. While that experience on the whole was more positive than negative, the percentage of negative experiences was higher than in other countries. And a larger percentage of US consumers did less business with the company after the deal. So there’s an opportunity for a smoother transition, and that opportunity centers around earlier consideration of customers and regular communication with them during the acquisition.
Some industries may be able to benefit more from this than others. While US consumers think M&A is more positive for customers of tech, hospitality and manufacturing companies, other sectors get lower marks. Pharma deals, for instance, were seen as negative for customers by 30% of US consumers – double the non-US response. When it comes to day-to-day impact on customers, pharma, healthcare and insurance all yielded higher responses from US consumers than global.
Refining focus through deals
For some companies, developing deeper customer relationships means reassessing existing businesses and determining which ones may be a distraction from core products and services. We’ve seen several acquisitions this year also involve divestitures – not only due to regulatory or competitive issues, but because companies are following their strategic focus. And these don’t have to be industry giants that are everyday names, as one US chipmaker illustrated recently with an acquisition and divestiture in a matter of days.
I expect more companies to come to a reckoning on what they’re really good at versus where they’ve been trying to compete with limited success. Think about automotive companies and the wave of navigation systems they developed several years ago. Seemingly every automaker had its own system … for the same roads that everyone uses. Many eventually realized that instead of continuing to invest in in-house systems, they could leverage technology from other providers that did it better and would be more useful to the car owner.
We could – and in some cases, should – see this elsewhere. Consider consumer products. For some companies, their manufacturing and distribution operations have been very successful. Their marketing and merchandising, not so much by comparison. Rather than keep trying to build those areas, certain companies may want to consider selling them to owners that can do it better. Then the consumer companies could partner with or simply hire those capabilities and redirect their own focus on the core businesses that deliver the best returns.
The increasing importance of intangible assets
Whether buying or selling, companies need to understand the true value of the assets in play, especially as company valuations as a whole remain elevated. In some cases, high multiples have been driven in part by intangible assets – something that will become increasingly important in deals.
Tangible assets are still instrumental in determining deal value, of course. But the opportunities for companies to blaze new trails with certain intangible assets have rendered the traditional balance sheet obsolete. For instance, applying emerging technology to the unparalleled amount of customer data that many companies have could strengthen customer relationships. It also could elevate risks to customer privacy and trust. How do you value that in a transaction? And do you even want to do the deal without knowing that value?
Workforce is another one. The employees themselves are very tangible, but what about their skills and perspectives, especially when it comes to the digital world? Beyond simple numbers and functional roles, employee behaviors, desires and increasingly varied backgrounds could be leveraged in new ways for better workplace environments and customer connections. And a workforce that shows agility and the ability to learn and evolve would seem to command a higher value, and understandably so.
These are different than traditional assets on which it’s easier to place a value, such as real estate or machinery. But as the M&A appetite – particularly for high-priced deals – remains robust in a still-healthy economy, calculating the value of these intangible assets will be critical in deciding which transactions make sense and how buyers can translate them into solid returns for shareholders and positive outcomes for customers.
For more details on Q2 2019 deals activity, including individual sector reports, be sure to visit PwC Deals Industry Insights on July 25.