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Investing to grow

In this article, Shane Horgan looks at companies that have built up healthy cash reserves and strengthened their balance sheet during COVID-19 are looking to ‘buy and build’, nationally and/or internationally.

We’ve been looking closely at the paths that businesses are taking in their pursuit of growth – and what makes each of these strategies successful. Of course every business has its own unique circumstances, but four broad strategies (which are not mutually exclusive) dominate: investing to grow, divesting and optimising, pivoting, and doing more with what you have.

Building on stengths

Businesses that rode out the pandemic strongly have emerged in a good position to build on their strengths - through expansion into new markets and geographies. While organic growth can be the right choice for some (see "Doing More With What You Have"), for those with a surplus of cash and a healthy balance sheet, acquisition of a promising business is the go-to option for growth.

“Deals designed to access new avenues of growth are one thing, creating value through a deal is another.”

Let’s take, for example, the consumer goods industry. While some have suffered in the past year, others have emerged strongly and are looking to build on these foundations to push ahead of the pack. In most sectors there will always be categories, products or services that are creating a buzz, and in the case of the food sector it’s meat free products. It’s a category that is seeing rising levels of consumer demand – sales of meat-free foods increased by 40% in the UK alone between 2014 and 2019 and are expected to be worth more than £1.1bn by 2024 – but which is also in line with ESG agendas. 

That has triggered huge deal activity and competition within the sector. In 2018 Unilever, for example, acquired the Vegetarian Butcher, which it described as ‘a step on [our] journey towards a portfolio with more plant-based products’. More recently, Unilever announced a partnership with the food tech company ENOUGH, which will bring more plant-based food products to market.  

And it’s not just the meat-free category that’s booming. Wellness is also attracting huge amounts of attention; Unilever has recently completed deals to buy SmartyPants vitamins in the US and Onnit, a wellbeing company based in Texas. Across the world, food businesses are reassessing and reshaping their portfolios – and much of the competition is focused on these two areas, with good reason.

We’re seeing similar trends in other sectors too. Tobacco companies, for instance, started showing an interest in the highly fragmented e-cigarette market in around 2012. The following years saw a flurry of deals; it’s estimated that the e-cigarette and vaping market quadrupled in value between 2013 and 2019, and will be worth $34bn by the end of 2021.

Deals designed to access new avenues of growth are one thing; creating value through a deal is another. Unilever’s deal with The Vegetarian Butcher is proving promising. At the time of the deal the Vegetarian Butcher’s products were sold in 4,000 outlets in 17 countries; today they are sold in more than 20,000 outlets in 30 countries. But that doesn’t mean that every deal in such a competitive market will create value. 

We know the risks – our Creating Value Beyond the Deal study found that 53% of companies underperformed their industry peers, on average, over the 24 months following completion of their last deal, based on total shareholder return (TSR).

In such an intensely competitive and fast-moving market, it’s easy to take a misstep, such as paying too much for a deal. And businesses in the position to move quickly – such as those with plenty of cash and purchasing power – are particularly vulnerable to overeagerness.

This risk can be minimised with the help of calm planning and careful thought:

Challenge yourself. 

Why are you thinking of buying this business? How does it fit in with the overall growth strategy? Why this business in particular?

What is the value creation plan? 

How will you extract maximum value from the deal? 

What could put value creation at risk? 

The answer to this is often people and cultural integration. 

Deals-led growth is typically characterised by large companies hoovering up smaller, entrepreneurial businesses. The risk is that these businesses which have a clearly articulated purpose and values which are widely understood and felt by their people, for example those with a culture that nurtures creative energy and talent, could be lost or dampened when subsumed into a huge multinational. This can have an impact on the retention and attraction of the right skills and talent. It’s not inevitable, but intelligent cultural integration takes work. 

The recognition that some brands and businesses might do better on their own, where they can establish and pursue their own people strategy, without fitting into the operating model of a large corporate, has driven a number of deals in recent years, including Nestlé’s sale of its ice cream business to Froneri, a joint venture it set up with a French private equity firm. 

And there are plenty of examples of deals that haven’t worked out quite as intended, for a wide variety of reasons. Reckitt Benckiser recently sold its China baby formula business, which it acquired in 2017 as part of its purchase of Mead Johnson, following lower sales than expected. Growth in baby products in China was thought by many to be almost guaranteed when the country’s single child policy was lifted, but birth rates have remained low. 

Our CEO survey found that a deal forms part of the growth strategy for 39% of business leaders, an increase from 32% over the previous year. In other words, deal competition is not going to ease any time soon. Every deal has an element of risk but planning, insight and a careful focus on value creation at every stage will minimise the potential for downsides.

“Every deal has an element of risk but planning, insight and a careful focus on value creation at every stage will minimise the potential for downsides.”


The value bridge

Knowing where to start when it comes to Value Creation can be difficult. We use a framework called the value bridge to help our clients visualise and work through the core foundations that will enable them to create value in their business, value that makes the difference, whatever their strategy or situation. Watch our value bridge animation to find out how, together we can help you create value.

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Value bridge

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Contact us

Shane Horgan

Shane Horgan

Partner, Delivering Deal Value, PwC United Kingdom

Tel: +44 (0)7921 107323

Christopher Temple

Christopher Temple

UK Value Creation leader, PwC United Kingdom

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