Deals 2019 mid-year outlook

As companies make deals to drive scale, the motivation isn’t just about size

As the United States hits 10 years of uninterrupted growth, concerns over the health of the economy are beginning to loom larger. Recession risks are rising as trade tensions between the country and other nations deepen. While a downturn may arrive as soon as late next year, it’s unlikely to fully halt one of the longest-running M&A cycles in recent history. M&A in the United States will remain active for some time, as companies will continue to use inorganic growth to fuel their businesses. Capital is available for those investment ambitions, and chief among them have been companies’ desire for scale. That’s been evident in traditional scale deals, including megadeals of more than $5 billion aimed at increasing market share in various industries. However, the benefits from scale economies are no longer just about size.

As new technologies alter the cost of doing business and compel companies to look beyond their own industries for innovation, scale will increasingly involve automating and standardizing systems and processes. To drive companies to change more quickly, scale will also involve upskilling and training employees and developing workplaces that incentivize them to continually learn.

Increasingly, scale will also involve speed. Some of fastest-growing tech companies knew early on that they needed to quickly arrive at a certain scale to be valuable. They scaled faster than their competitors, realizing that if they were the first to reach customers they could also potentially own the entire market. If companies decide to follow this path and “blitzscale,” they’ll need to take on far more risks than others going through the traditional process of scaling.

There are barriers to scale, though. For one, dealmakers will need to keep a keen eye on emerging tech disruptors. Second, as geopolitical tensions rise, particularly between the United States and China, investors will need to consider how regulatory uncertainties could impact efforts to scale globally. And as more companies pursue digitization and build data-driven businesses, dealmakers will need to develop new ways to proactively respond to cybersecurity and privacy risks.

Economic headwinds

Despite regulatory uncertainties and other potential barriers to scale, expect the market for deals to be strong in all sectors.

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A healthy capital mix provides resources for the right deals

US companies have benefited from a healthy capital environment throughout this M&A cycle. Despite US recession concerns and other possible headwinds, various indicators suggest that corporate and private equity investors will continue enjoying unparalleled access to capital for potential deals.

Along with cash on US corporate balance sheets at approximately $2 trillion and about $1.5 trillion of available capital at private equity (PE) firms globally, US non-financial corporate businesses have had the balance sheet capacity to increase debt to $6.2 trillion. To be sure, certain industries—most notably, technology—have enjoyed significantly more access to capital than others. Some of these funds may become limited in a downturn, but the amount needed for a deal could also decrease if company valuations start falling from today’s lofty heights.

The mix of M&A financing has increasingly shifted over the last several years. Starting around 2005, the share of deal value financed partly by cash and various types of borrowing began to increase significantly, outpacing increases in deal value financed at least in part by stock or bonds issuance. This trend has accelerated through 2018 and will likely continue for some time.

Given the multiple sources of capital available, the market for M&A will be increasingly competitive. Buyers’ appetite for yield means that value capture and creation will be integral to deal success. While a focus on market risks is necessary, there are opportunities on the horizon, including rethinking assets under ownership or expanding into adjacent markets to drive growth.

How capital could drive dealmaking

The availability of capital means the market for M&A will be very competitive.

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Tech’s double-edged sword: an opportunity and barrier to scale

Technology assets continue to be the most active area in the M&A market, and this presents new ground for many companies as they acquire new technologies to drive strategies and expand into new or existing industries.

The challenge for dealmakers, however, is understanding how certain technologies could evolve. For example, artificial intelligence has been around in some fashion for more than 50 years, and businesses are only now starting to realize its potential in healthcare, finance and other industries. Blockchain, by contrast, has existed for roughly a decade and is relatively less understood. While businesses today have generally demonstrated more interest in AI, blockchain’s tamper-proof ledger can automatically record and verify transactions—and could change the way many industries do business in the coming years.

It’s also challenging for dealmakers to understand what they’re buying. Tech diligence is highly specialized, requiring a deep dive into a target’s data and systems and being able to foresee the potential and risks of technologies that are continually changing. For instance, an AI target might look promising, but the technology behind it may not turn out to have the capabilities promised. According to a survey by London-based venture capital firm MMC, 40% of European startups that are classified as AI companies don’t actually use AI.

So it’s important to ask questions that clarify what buyers are actually acquiring. Does the technology work as well as the target claims? Is the market ready for the technology, or is it ahead of its time? How good is the data that powers the technology, and will the buyer be able to access the data post-close?

Without thoroughly evaluating a target’s technology, an acquirer will have a hard time being confident in—and explaining to stakeholders—how it will contribute to the business. Also, there could be costly surprises the acquirer may not be prepared for, or the technology may turn out to be less functional and therefore less valuable than expected.

Consider a partnership or joint venture. These deals are complex but can address some of the common challenges of a traditional acquisition, including sharing financial debts or sensitive data. They can also serve as a testing ground for companies that are intrigued by new technologies but aren’t ready to commit. Early-round investing is also an effective way of staying connected to emerging solutions and keeping a pulse on the latest and most disruptive innovations.

The definition of tech is changing

Expect to see more companies converge different technologies so they can scale faster.

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Geopolitical tensions: How to scale globally in an increasingly fragmented world

"Companies will just have to get used to the idea that they’re going to have to play in a much more varied field."

Fareed Zakaria geopolitical strategist and host of CNN’s Global Public Square

The ongoing trade war between the US and China, as well as America’s threat to impose escalating tariffs on imports from Mexico and the European Union highlight broader geopolitical tensions arising across other parts of the globe. These tensions also suggest the likelihood of a new world order that could redefine what it takes to be a global company.

The longer US and Chinese tariffs remain in place, the more likely they’ll affect the global economy, including consumers and companies in other countries. In the long run, tensions could manifest into a more fragmented world economy, according to geopolitical strategist and host of CNN’s Global Public Square, Fareed Zakaria. Markets will become more regional and less global in the traditional sense.

This is already playing out in some parts of the world, as major economies have either implemented or are considering new rules to protect firms at home from foreign competitors. The US-China conflict has captured much of the attention, but other nations are becoming more assertive. For instance, India is considering new rules over its technology industry that could limit US tech firms’ reach into the world’s fastest-growing market for new internet users.


Fareed Zakaria geopolitical strategist and host of CNN’s Global Public Square

Short-term, tariffs are likely to have the most impact on the value of deals, adding another level of complexity for dealmakers when determining an asset’s projected return on investment. For PE firms, tariffs could add pressure on the value of some current investments and delay time horizons for exit.

Long-term, if geopolitical tensions rise further, the impacts could ripple beyond global trade and further complicate US firms’ overall plans to scale globally. This applies not only to the purchase of assets in developing markets but also the acquisition of specialized talent abroad.


Fareed Zakaria geopolitical strategist and host of CNN’s Global Public Square

Dealmakers will need to proactively reassess their supply chains, factoring how new regulations and the changing global landscape could affect their businesses and potentially future transactions. Given the likelihood that companies will be operating in an increasingly fragmented global market, the roadmap US companies have used to globalize over the last 40 years will need to be replaced.

And as national security plays a bigger part in US economic policy, companies investing abroad will need to reassess their plans if they hope to receive US approval for transactions. This could include favoring more moderate acquisitions, as well as acquisitions that fall outside of the technology industry.

Navigating the uncertainties of trade tensions

Companies are already planning and strategizing for new supply chains amid regulatory uncertainties.

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Cybersecurity: With rising risks, deals need extra diligence

As companies pursue digitization to drive their business strategies, they will also need to form a deeper understanding of the cyber risks they could expose themselves to. Cyberattacks, specifically targeted at the US and Europe, are likely to increase in the years ahead. In particular, nation-state hackers are proactively monitoring M&A within specific industries, especially technology.

This comes as data privacy matters more to both consumers and governments. According to a recent PwC Consumer Intelligence Series report, data security is a top concern of consumers when companies are acquired. Meanwhile, several US states, led by California, have either passed or proposed online privacy laws following Europe’s General Data Protection Regulation (GDPR).

With M&A, companies are particularly vulnerable to cyber threats during the period between a deal’s announcement and closing. For instance, when large companies announce a deal, it’s not uncommon for hackers to attack the smaller company, knowing it may be an easier target. Since most breaches typically aren’t identified until 18 months after the initial attack, managing the risks becomes even more complex.

Many target companies need significant investment to get their cybersecurity and privacy capabilities up to acceptable levels, so it becomes critical for acquirers to price in immediate and ongoing costs to address deficiencies and manage the risks of their investment.

There’s also integration planning to consider. The successful combination of an acquirer’s and a target’s data and networks can be a big factor in a deal delivering value, but the rush to integrate could expose the companies to unforeseen cyber and privacy risks.

Segment, clear and integrate. This three-pronged approach includes keeping the acquirer separate from the target until the acquirer can determine that the target’s systems have not been compromised. An important question is whether the target has had an independent party test its environment for security vulnerabilities that hackers could exploit. If not, that’s a red flag.

It's also critical to include cybersecurity leadership in the deal. Far too often, corporate acquirers do not involve the chief information security officers (CISOs) in the deal. As a result, when security experts want to help the deals team understand potential synergies with the target environment, they don’t have a complete picture of the acquirer’s current environment.

Tech companies aren’t necessarily experts in cybersecurity

Some companies risk releasing products without the professional advice of security teams.

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Invest in human skills, not just digital skills

"If I was a company thinking of acquiring another one, one of the first things I’d look at is, ‘Is this a company built for learning?"

Lynda Gratton London Business School management professor

As companies acquire emerging technologies, human skills—the ability to listen actively, think critically, feel and be creative—will be more valuable than ever, according to London Business School management professor Lynda Gratton. Technologies such as AI can help businesses better manage simple, repetitive tasks, but they aren’t necessarily suited for more complex work, such as managing people.

As a result, it becomes critical for dealmakers to evaluate not only the skills being acquired but to also assess what types of training employees will need in the future to help drive growth. While employee training has long been a fundamental part of plans to integrate companies, the focus has shifted considerably amid technological change—moving from training on systems and processes to training centered on developing effective leaders.

At many workplaces today, career development is no longer considered a company perk available to a select few. Employees expect continual learning, and so dealmakers will need to consider employees’ workplace experiences and skill sets as they pursue transactions.


Lynda Gratton London Business School management professor

Retention of talent. Workforce training and upskilling not only helps companies innovate and grow, but studies suggest it also helps retain talent.

Innovation and growth are also at stake. A company’s innovation and growth is only as strong as its workforce. Machines and robots help companies become more efficient, but people bring in new ideas and creativity that drive innovation.


Lynda Gratton London Business School management professor

Evaluate workforce needs. This starts with a comprehensive integration plan, which blueprints how the acquirer and target will combine their workforce. In devising such plans, companies should consider their workforces and develop appropriate strategies to address what skills will be needed in the future. Also, they'll want to determine whether those skills will be developed in-house or acquired or accessed through partnerships or joint ventures.

Also, determine whether the company being targeted is built for learning. The answer will say a lot about how analytical and creative employees are. Assess what plans and resources are in place to support upskilling and career development.

Your workforce can accelerate scale

If employees aren’t upskilled or incentivized to continually learn, it will be challenging for companies to scale quickly.

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Looking ahead

The market for deals should remain resilient against economic pressures ahead. Scale will drive deals, and capital will be readily available to extend the duration of this M&A cycle. However, dealmakers will need to carefully navigate the various barriers to scale and consider the following:

Partnerships and joint ventures to test emerging technologies that have helped companies deepen their footprint into existing markets or expand into new ones.

Reassess supply chains, taking into account how new regulations and geopolitical tensions could impact businesses and future transactions.

Involve cybersecurity leadership in deals, given the rising threat of cyber and privacy risks.

Evaluate a deal’s workforce needs through a comprehensive integration plan that identifies what types of training employees will need in the future to help drive growth.

Contact us

Colin Wittmer

Deals Leader, PwC US

Curt Moldenhauer

Deals Sales & Marketing Leader, PwC US

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