In today's M&A market, dealmakers are increasingly under pressure – resulting from increased disruption, industry convergence, technological change and the need to shift to new business models to stay competitive – to maximize and deliver value from each deal they do. One would think, therefore, that value creation would be a priority for dealmakers. However, a recent report by PwC (prepared in conjunction with Mergermarket and Cass Business School) shows that this may not be the case.

Key findings from the report include:

  • Many acquisitions and divestments do not maximize value – even when some dealmakers think they do. Based on total shareholder return, 53% of buyers and 57% of sellers underperformed their industry peers, on average, over the 24 months following completion of their last deal.
  • Companies that prioritize value creation early on have a better track record of maximizing value in a deal. Acquirers and divestors that prioritize value creation outperform their industry benchmark by 14% and 6%, respectively, on average 24 months after the deal closes.
  • Priorities can be mixed. A significant number of dealmakers (66% of acquirers) say that value creation should have been a priority right from the start, but only 34% of acquirers surveyed said that value creation actually was a priority on Day One (deal closing).

To ensure that value is created beyond the deal, PwC suggests an approach built around 3 core areas:

  1. Stay true to strategic intent: The organization needs to approach deals as part of a clear strategic vision and align deal activity to long-term objectives as opposed to engaging in opportunistic deal-making (which can create value, but not as often).
    • 86% of acquirers say that creating significant value was part of a broader portfolio strategy rather than opportunistic.
    • 93% of organizations who reported significant value creation invested 6% or more of their total deal value in integration.
  2. Be clear on all the elements of a comprehensive value creation plan – it should be a blueprint, not a checklist. There should be a thorough and effective process for conducting the deal with the required diligence and rigour in the value-creation process across all areas of the business.
    • 89% of sellers say there is room for improvement on optimizing the tax and legal structure of the deal.
    • 83% of sellers say there is room for improvement on extracting working capital.
    • 79% of buyers whose deal lost value did not have an integration plan in place at signing.
  3. Put culture at the heart of the deal. Making sure that people and cultural aspects are considered during the planning stage is fundamental. Wide engagement and communication of value creation will help to retain key personnel and build employee buy-in. Failing to plan for cultural change can be significantly detrimental to long-term value creation.
    • 89% of divestors surveyed believe they could drive more value from a sale by engaging with management more closely.
    • 82% of companies who say significant value was destroyed in their latest acquisition lost more than 10% of key employees following the transaction – this can be a problem when an increasing number of deals are "asset light" or made up of predominantly "people-centric" intangibles.

The author would like to thank Scott Thorner, articling student, for his assistance in preparing this legal update.

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