Building Your Sustainable M&A Business Strategy

Nicholas J Price

All things point to the notion that deal making is on the rise despite increasing geopolitical and economic concerns. Executives agree that their M&A business strategy is complicated by technology, regulation and innovation, and that not all these issues will have the same impact on companies. The executive position requires them to be more active than ever. Today’s climate requires executives to continually assess the impact of changes and the potential for opportunities as they pursue a sustainable M&A business strategy.

A sustainable M&A business strategy in today’s markets requires a willingness for executives to let go of past assumptions and carve out new paths for themselves. More than ever before, it’s crucial for executives to understand their competitors’ ecosystems, as well as their own. It’s prudent to keep their options open while engaging in scenario planning and threat analysis to underscore and identify risks to current operations.

Executives face the constant challenge of the shortage of technical and digital capabilities, which forces them to continually reinvent their strategies for acquiring talent and digital solutions. Some companies have identified and actively target acquisitions as the fastest way to obtain these resources.

It’s a given that companies must create long-term value for all stakeholders and demonstrate that they’re good corporate citizens. A downturn in deal making could diminish future competitiveness, and executives have a tall order before them in 2020 as they try to find the balance between resiliency and vision.

M&A Market Expected to Improve

Overall, the most recent M&A upcycle has lasted far longer than normal cycles in the past – and longer than most financial experts expected it to. The basic assumption here is that companies need to transform their portfolios quickly. In many cases, they’re simply unable to do it without M&A. Deal making is often the quickest means for building the optionality that companies need to respond to fast changes in the marketplace. Concurrently, companies are using divestments to release the capital they need for acquisitions. Perhaps the biggest factor that’s holding companies back from growth is margin compression, which makes it difficult for them to recoup their input costs.

Companies Intend to Pursue M&A

In a report by EY, 52% of companies stated that they intend to actively pursue M&A within the next 12 months. There is a large variety of deals being evaluated as companies attempt to improve their business models due to changes in technology and the competitive landscape. As a result, company pipelines are increasing. Given the combination of the broad scope of deals being evaluated and the perception of challenging valuation levels, the outlook for M&A deals is modest but promising.

2020 May Bring Hostile and Competitive Bidding

The EY report also stated that almost two-thirds of companies are expecting an increase in hostile and competitive bidding. These are signs of a healthy market, although it bears the risk of companies overpaying for acquisitions.

Challenges with Hiring and Retaining Qualified Staff

Having access to qualified talent continues to be a formidable challenge for companies. All the conjecture about the threat of lost jobs because of technology hasn’t come to fruition just yet.

Advancements in technology are increasingly automating many jobs, but our career-oriented population isn’t advancing with the right technical and digital skills needed to supply corporations with the right talent that’s necessary to create efficiency in the M&A arena. As a result, many companies are resorting to reskilling their existing workforces to better respond to technology needs and changes. Companies may need to aspire to create a culture of lifelong learning to respond to talent challenges as they evolve in the future. Contingent workers may be the answer to helping move past this difficult transformation.

Companies are saying that the main strategic drivers for pursuing deals pertain to sector convergence and acquiring the right talent.

Increase Allocation to Technology

According to EY, “technology-driven transformation is the key to future growth.” More than 50% of the respondents to their survey indicated that they’re allocating 25% to 50% of their capital to digital transformation. The focus relates more to future growth than to making operations more efficient. The trend to increase budgets for technology extends to all sectors and geographies.

An Economic Downturn Is Unlikely in the Near to Midterm

Since we haven’t experienced a recession since the 2008 financial crisis, many believe that it’s prime time for an economic downturn. Most companies agree that the next financial downturn isn’t likely to be significant and it isn’t likely to occur in the very near future. The minority of executives who believe that there will be a severe economic downturn don’t believe that it will occur until sometime in 2021 or 2022. With the reality that a downturn is coming at some point in the future, it makes good sense to take advantage of today’s reasonable financial conditions to reassess vulnerabilities in the portfolios and divest of assets that aren’t in line with their future growth-sustainable M&A business strategy.

Ongoing geopolitical, tariff and trade concerns have the potential for regulatory impacts and uncertainty, including trade disputes and climate-change policies. Some companies have cited these concerns as the greatest external risks to their businesses. With this in mind, most companies are actively planning to respond to these issues. These types of risks are placing heavy pressure on countries that have major export activity and those that have divided domestic agendas. One thing that is helping to offset these concerns is that economies where the predominance of corporate activity relies on consumer spending and services have the support of strong employment statistics, solid growth in wages and a low rate of inflation.

Concluding Thoughts on Building a Sustainable M&A Business Strategy

Steve Krouskos, EY Global Vice Chair, acknowledges that these are challenging times, and the successful executives will need to continue to walk a fine line in their efforts to achieve a sustainable M&A business strategy. As we move into the future, Krouskos advises companies to focus more on how prevailing uncertainties could impact their business. He also recommends that companies work to build optionality into their strategies and buy into the next wave of capabilities, rather than wait for a more opportune time. These are the keys to planning a path that creates long-term value for the company and the stakeholders, as well as society as a whole.

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Nicholas J. Price
Nicholas J. Price is a former Manager at Diligent. He has worked extensively in the governance space, particularly on the key governance technologies that can support leadership with the visibility, data and operating capabilities for more effective decision-making.