M&A value creation for growth

Get used to uncertain times.

With our latest Economic Outlook projecting growth of just over 1%, the UK’s business leaders are on balance feeling more muted around their opportunities for organic growth than in previous years. So what path for growth should CEOs unwilling to settle for the status quo look towards? We believe that in today’s economic climate, large rewards could lie ahead for those able to fully unlock the value strategic acquisitions offer. Mergers and acquisitions (M&A) offers a fast-track to technological innovation, new product lines or new markets, all of which can help growth. But with deals getting more expensive, to get the outcome you want, the one thing business leaders can’t shortcut is their investment strategy.

Read our full report: Creating value beyond the deal

Questions for businesses:

  • How well does your strategic M&A planning match your strategic objectives?

  • How does buying in technology compare to the cost of developing new products/services yourself?

  • How much shareholder value did your recent M&A activity deliver against expectations?

Transforming your business to realise its full potential

In our experience, realising the full potential of an acquisition starts with a sharp focus on how any deal activity aligns to long-term strategic objectives. Supported with a clear and comprehensive value creation plan, there is a real opportunity to transform your business.

And the best target may lie outside your traditional niche.

For example, the increasing need for companies in all sectors to move to a ‘tech-enabled’ model presents a range of resource and investment challenges for those slow off the starting block. Buying in the technology rather than embarking on a much longer build process is a tempting prospect. And indeed with a vibrant start-up scene, the UK market is not short of technology disruptors.

We are already seeing examples of those who have successfully looked to strategic technology acquisitions to power their business growth. In financial services, specialist technology transactions are taking on a much bigger role in terms of overall deal activity.

The right technology target can unlock entirely new business models for those willing to see beyond the obvious and companies that are clear about the rationale of the deal will reap the rewards. Realising the value of these deals, however, also requires an effective process to integrate acquisitions. And that means applying equal focus and rigor during planning to what happens once the deal is done.

The right technology target can unlock entirely new business models for those willing to see beyond the obvious and companies that are clear about the rationale of the deal will reap the rewards.

Balance the investment in new products or markets against M&A

Developing new products and services plays a vital role in organic growth, and 61% of UK CEOs say new product development is an activity that they will pursue to drive growth in 2019. But developing new products takes time and investment, and it is far from guaranteed that those products or services will fly off the shelf.

For companies of significant size, M&As can help deliver results faster with fewer of the risks associated with new product development.

Likewise, M&A can also offer an immediate route into an untapped market, with an immediate presence, suppliers and customers. It is a very logical thing to do as it offers the potential to reduce the risk of an organic entry.

Large deals are by their nature complex. While they offer a faster route to market, and proven market demand for products and services, businesses wanting to reduce the time and investment costs of taking this on organically should keep in mind the time and energy of M&A itself. In both cases, comprehensive planning and rigorous due diligence will let businesses assess the return on investment with value front and centre.

61% of UK CEOs say new product development is an activity that they will pursue to drive growth in 2019

22nd CEO Survey

Successful value creation

At PwC we refer to “value creation,” which is the blueprint for how value is realised after the deal. M&A though should not be prescribed or limited to any one strategy. If you have a value creation plan, M&A can be a real transformation catalyst.

The success of a merger or acquisition comes down to how a business executes the transaction. A big premium exists for companies that get the transformation right as part of the deal as opposed to acquiring something and then working out what to do with it. Driving value through the entire transaction is becoming more and more important. Our research over an eight-year period found over 50% of measurable M&A didn’t generate shareholder value over the 24 months following completion. But if you get M&A right the results can be spectacularly transformative, so winners win bigger.

Acquisition might look like a shortcut to new technology, business model, products, or markets, but deals are getting more expensive. Analysis by Thomson Reuters shows average acquisition multiples across all deals globally had risen from 11.7 times earnings in 2010 to 14.8 in 2018. This means buyers have little margin for error in making the deal pay. 

M&A though should not be prescribed or limited to any one strategy. If you have a value creation plan, M&A can be a real transformation catalyst.

Three core areas to value creation

In our report Creating value beyond the deal we identify that a modern, effective approach to value creation must be built around three core areas:

Stay true to the strategic intent:

The organisation needs to approach deals as part of a clear strategic vision and align deal activity to the long-term objectives for the business. Opportunistic deal-making can create value, but not as often.

Be clear on all the elements of a comprehensive value creation plan – it should be a blueprint, not a checklist:

Ensure a thorough and effective process for conducting the deal with the necessary diligence and rigour in the value creation planning process across all areas of the business. Consider how each of these support the business model, synergy delivery, operating model and technology plans.

Put culture at the heart of the deal:

Keeping people and cultural aspects upfront in planning is fundamental. Wide engagement and communication of your value creation plan will help retain and build buy-in from key personnel. Failing to plan for cultural change will significantly undermine the value created.

M&A for growth is not a coin toss

We’re having highly engaged conversations with our clients around how best to drive value through M&A and which levers to pull as part of value creation. M&A is not a coin toss because there are more ways to measure the benefits. It all comes down to treating M&A strategically, having a clear blueprint about why the deal will drive value, who owns that value creation within the company and what are the real things to focus on.

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Marissa Thomas Marissa Thomas

Marissa Thomas

Head of Deals

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