Amid market uncertainty, deal volumes and values in 2019 fell slightly, with activity supported by mega-deals in Pharmaceuticals, high levels of Private Equity dry powder and a large number of focused acquisitions. Especially in uncertain times, a seamless integration is key to adding shareholder value.
So near and yet so far. For a moment towards the end of 2019, a surge in transactions made it seem possible that last year might break 2018’s record achievement for highest deal numbers and values. In the end, 2019 deal volumes and values fell slightly short. This is in itself a remarkable achievement given the heightened uncertainties we’ve seen over the past twelve months.
A strong performance despite uncertainties
2019 stood out for a number of reasons. Firstly, the situation over Brexit became even more unclear and directly contributed to a fresh general election in the UK in December. The US’s trade dispute with China looked like it was settling, then flared up, then calmed again – while President Trump imposed tariffs on the EU in a dispute over aircraft subsidies. Then the situation in Hong Kong flared up, with protestors taking to the streets in huge numbers.
All of these issues – and more – affect economic prospects, confidence, and M&A.
The deals and sectors that bucked the trend
Amid the slight decline in transaction figures, some sectors actually saw increases. For instance, total deal values in Technology, Media and Telecommunications rose by 47 percent; the number of Chemicals deals increased; and both the number and value of Pharmaceuticals and Life Sciences deals were up – by 41 percent and 121 percent respectively. These are significant results.
Further, every year has headline-grabbing deals. Last year was no exception. The USD31 billion spin-off of Alcon by Novartis was 2019’s largest transaction, contributing strongly to the increase in activity in that sector. Viagogo’s acquisition of StubHub from eBay, Swiss Re’s sale of ReAssure, and the USD10 billion sale of Nestlé Skin Health to a consortium that included Sweden’s EQT, are all noteworthy.
Private Equity: involved in almost half of the 50 largest Swiss deals
The EQT / Nestlé Skin Health transaction demonstrates something I’ve been saying for a number of years now: a combination of the high level of Private Equity dry powder that is looking for a home, and the expansion in scale that we’re seeing from a number of Private Equity houses with their ability to carry out complex, transformational transactions on a global scale.
In fact, Private Equity was involved in almost half of the 50 largest deals involving Switzerland last year. That’s quite an achievement and shows the growing importance of this investor class.
Uncertainties make robust integration even more important
Of course, buying a company is only the start. It’s what you do with it once you’ve bought it that makes the difference. And this process of integration and creating value starts long before the deal closes.
More than 20 years ago, KPMG published its first study on the value added (or lost) by M&A. It found that only around one-fifth of M&A transactions delivered the increase in shareholder value that had been anticipated when the deal was announced. Various studies over the past two decades show that this statistic has hardly improved – or at least not as much as it should have done in light of the professionalization of the deal-making community in the meantime.
Even over the past few years, Statista reports that around one-third of deals add the expected value. And, far more worrying in my view, that almost 40 percent of deals actually destroy value.
This needs to change. Adopting a seamless integration strategy is critical. One that begins already pre-deal and continues through the in-deal and post-deal phases. In the pre-deal phase, this requires a holistic vision for the two businesses and involving operational people in the due diligence process. In the in-deal phase, refining due diligence findings and laying the groundwork for Day One readiness – including a target operating model and identification of value creation initiatives. And in the post-deal phase, maintaining the deal momentum to execute the integration plans, including appropriate communication with stakeholders.
In short, a deal provides an opportunity to rethink established business and operating models, to reflect on culture, change management, financial ambitions and so much more in order to drive the incremental shareholder value that the deal promised at the outset.