1. Introduction
The macroeconomic corporate environment is becoming even more complex and dynamic on an account of insecure and ambivalent prospects, such as volatile global trade relations (e.g. US/China, Brexit), uncertainty regarding continuous availability of cheap funding and a recent economic downturn triggered by the global pandemic. Furthermore, activist investors mercilessly aim for maximization of shareholder value when they detect unrealized value potential.
Yet with intensifying concerns and warnings of an impending economic downturn with dusty and ambiguous planning parameters the M&A tide is about to turn and sellers prepare to reduce the overall risk profile, broaden the applied risk funnel in corporate planning and increase flexibility as well as agility for possible transactions. Gaining a clear and comprehensive understanding of the corporate portfolio and how it fits with the operationalized strategic goals, as well as the complexity of underlying operational entanglement, is paramount in this context and defines successful divestors with a clear focus on value preservation.
2. How volatility triggers has an impact on strategy and operations
Corporate environments have become ever more volatile, uncertain, complex and perplexing – and this trend is expected to continue in the future. Triggers are very diverse, and come in the form of new regulations, changing consumer preferences, environmental hazards, political tensions, technological innovations or pandemics, as recent events have shown.
This increased volatility has a severe impact on corporate planning parameters, causing them to change more frequently and drastically, which may in turn undermine the foundations of corporate strategy. Corporate planning parameters therefore need to be constantly monitored and analyzed to determine whether corporate strategy itself needs to be adapted, or mere operational changes will suffice. The nature of the trigger events is the key criterion for this decision.
If the trigger event has a long-term impact on corporate planning parameters, corporate strategy will need to be adapted. A corporate strategy is only a theoretical construct. It is through the corporate portfolio that the strategy is implemented correspondingly. In an ideal world, a corporate portfolio would perfectly deliver the corporate strategy: we define this as a strategic fit. Whenever corporate strategy is being adapted, it needs to be complemented by organic or inorganic measures to adapt the corporate portfolio accordingly. Strategic fit also needs to be rebalanced to ensure that value potentials are optimally exploited and return on capital invested is maximized.
If the trigger event has a short-term impact on corporate planning parameters, the existing strategy can usually be maintained, as no substantial change is being made to the overall strategic direction. However, as short-term growth prospects likely to change, suitable measures to adapt the corporate portfolio might still be required to mitigate the impact of the trigger event. What constitutes “suitable measures” will depend on the severity of the impact; this can range from maintaining profitability or implementation of environmental, social, and governance considerations to ensuring the survival of the company.
This constant monitoring of planning parameters, reviewing of strategy, as well as adaptation and realignment of corporate portfolios needs to go hand in hand with realignment of the company’s operational backbone to ensure flawless and efficient delivery of operations. The extent of the operational adaptations and measures required depends on the characteristics of the underlying trigger events and is directly driven by strategic fit considerations.
Fig. 1 • Value preservation bridge
Source: PwC Delivering Deal Value
3. When volatility strikes: Covid-19 as a trigger event for value preservation
The impact of the Covid-19 pandemic on the economy has been severe in the short term, however, it will likely be less severe in the medium term and negligible in the long term, provided that sustainable vaccines will be found, healthcare systems will adapt and we will learn to manage the pandemics better. This means that the future strategic direction for corporates, on average, will not change as severe as the current impact of Covid-19 may be. However, every normal distribution has its tails, and the impact on some industries is more severe and will be longer-lasting than the impact on others. Moreover, corporates need to ensure they will survive the short-term impact and make it into the future. Otherwise the long-term outlook becomes irrelevant. What does this mean for corporate value preservation?
PwC has developed the Value Preservation Bridge to offer strategic and operational advice for executives on how to excel in navigating through the Covid-19 pandemic. The initiatives and measures are grouped into three areas – starting with preventing value leakage, through value preservation, and finally value creation – to offer tailored advice for the different phases of the pandemic.
4. Implications on the M&A environment
Adequate measures for value leakage minimization, value preservation, and value creation can be implemented by organic and inorganic means. We will focus on the inorganic measures, which can be divided into opportunities on the selling side and opportunities on the buying side.
On the selling side, the financial situation of the seller is crucial. If the financial situation represents a critical threat to the survival of the company, a fire sale of parts of the business might be an option to secure liquidity. However, sellers rarely realize the full value of the underlying asset when selling from a weak position – thus this situation should be avoided. For all other potential divestitures, the specific market situation and the expected sale prices achievable on the market are the key factors. Private equity investors and selected corporates are still disposing of significant “dry powder” and will be willing to pay adequate sums for less competitive access to assets than it was the case previously. In any case, the current crisis will enforce more scrutiny in the strategic fit and portfolio review processes. Once the resulting “core vs. non-core” business decisions have been made, a high degree of separation readiness allows market opportunities to be seized and strategic moves to be made.
On the buying side, a company can invest sales proceeds generated from previous divestitures, considered as a strategic move. In this way, a possible crisis-related reduction of the sale proceeds can be offset by a discounted acquisition price, while simultaneously improving strategic market positioning. Add-on acquisitions (without prior divestitures) should be pursued when opportunities arise to secure assets at a discount and with good strategic fit, provided that the buyer is in a good enough financial situation to absorb the cost. That can be a key competitive differentiator when it comes to the subsequent upswing.
