Five Factors to Sharpen Your Deals Strategy

The deals environment is active again after a brief pause at the onset of the pandemic. Companies are advancing from creating stability to pursuing growth or considering what components they can shed to shore up liquidity.

Pre-pandemic, there was a historic amount of capital available for mergers, acquisitions, and other investments. Now, months into the crisis, we are seeing some companies making big bets and others exploring opportunistic transactions—such as investments in online learning and virtual meeting spaces, or in distressed assets. All companies are in a different place, but for many, taking a deep dive to understand the company’s portfolio and deals strategy is a must for setting the business up for future success.

As corporate directors and executives take a fresh look at their portfolios and deals strategies—either opportunistically or out of necessity—they’ll need to focus from two separate vantage points: both the corporate level, considering economic scenarios and corresponding impacts on the businesses they want to be in, as well as how to allocate capital across those businesses; and the business-unit level, considering where (and where not) to play as well as how to succeed, taking into account customers, geographies, products, and more, and refining offerings to match customer needs with winning go-to-market strategies.

In this new environment, directors can consider the following examples of deal drivers to help ensure their management teams are weighing all options (e.g., acquisitions, joint ventures, alliances, and divestitures), as they keep their portfolios aligned with overall business strategy.

• New ways of being. Behavioral changes adopted in response to the pandemic will remain after the pandemic ends. As consumers continue to rapidly shift to online purchasing, touchless environments become the norm, and expectations around privacy and security adjust, there will likely be an impact on how organizations view their portfolio strategies. Boards may ask the following questions:

  • What products and services are important to our customers now, and how are we considering whether or not to develop them?

  • What is our investment plan—both organic and inorganic—as we move forward? Why is this the right approach?

• Shifting industry paths. Certain industries, such as air travel, have been ravaged by COVID-19 while others—tech companies, for example—have benefitted from the crisis. Recovery will be uneven as some industries bounce back faster than others. Also, the lines between industries will continue to blur, which will further confuse the landscape. Boards can consider the following questions:

  • Across our existing businesses, where do we have the greatest advantage in the market? Opportunistically, how can we gain an advantage during this time of great change?

  • If and where we have consistently underperforming businesses, are we considering any “exits”? If we choose not to exit, what is our plan to fix these businesses and what are the timeline and key milestones?

• Opportunities in innovation. The pace of technological change isn’t slowing, and the pandemic has revealed truly new ways of conducting business. As companies consider gaps in their portfolios or focus on new solutions to shore up operations, there may be sound opportunities for acquisitions or alliances that can jumpstart innovation. Along these lines, directors should ask the following questions:

  • How are we evaluating new innovation opportunities? Are we considering whether we have the culture, talent, and capabilities to achieve success with these innovation ideas?

  • Have we considered potential disruptors in the short and long term? Would long-term capital be more prudently used in an alliance or joint venture, or does rapid change require an acquisition

• Shifts away from an interconnected world. As globalization trends evolve—and perhaps even recede—companies will need to balance efficiency with the ability to be resilient. There are particular impacts to consider on supply-chain capabilities, in addition to corresponding customer satisfaction. To better survive in a future in which the fate of globalization is uncertain, directors may ask the following questions:

  • What is the right mix of ownership versus outsourcing, considering cost, security of supply chain, and tax impacts?

  • Does the organization have the right assets and alliances to compete abroad?

• The future of capital. Businesses want sources of long-term capital and interest rates will remain low. That means significant discipline is needed in setting capital allocation and portfolio strategy to achieve the highest returns. If a particular company is not the best owner of certain portfolio assets, there is a cost. The return on capital expenditures for organic growth and acquisitions for inorganic growth are crucial in this environment. Boards may ask the following questions:

  • Are we funding our opportunities with the right mix of capital (debt and equity) and the right transaction structure?

  • Is our capital allocation strategy driving appropriate returns on capital, with the discipline to redeploy if the returns are inadequate?

   

   

Colin Wittmer is the US deals leader at PwC.