This inflation-loaded year has turned the deal landscape on its head. There has been a transitional shift from a sellers’ market supported by very low-cost capital to a buyer-oriented market. Deal professionals who want to navigate this new world successfully need to make a decisive move away from standardization.
On November 1, 2022, Kate Bravery, Global Advisory Solutions & Insights Leader at Mercer, led an in-depth discussion with two other thought leaders — Devanshu Dhyani, Strategy and Corporate Development (S&CD) Head at Marsh McLennan, and Jeff Black, Global M&A Advisory Services Leader, Mercer — on how savvy deal-makers can deliver value and broker successful deals in the coming year.
The answer, as the discussion made clear, lies in gaining insights into critical talent/human capital elements early and strategically in deals. Kate raised the following issues to the discussion panel.
Returning to deal fundamentals seems to be the largest takeaway from this entire discussion. There has been an increase in deals post-COVID. However, Devanshu raised the question of “which businesses will prove themselves resilient,” regardless of the impact of any future downturn.
S&CD will focus on a number of factors moving forward, in particular stability, resiliency and “well-protected margins,” he added.
As Jeff observed: “You hear a lot of organizations [announcing that] they’re refocusing on the core strategy and shedding non-core assets.” His teams are working to strengthen this refocus on core strategy not only through divestiture support, but also in the coming wave of joint venture alliances and partnerships. These latter deal structures are driven by the current capital/lending market. In this context, the teams are seeing an increase in private investors on the buyer side of such corporate carve-outs. They are also discovering more opportunities to fill in stand-up support that helps consolidate a business’s viability. Some of the key issues in these situations involve building the right HR operations and programs to drive the necessary talent retention and acquisition outcomes.
according to a recent Mercer study around CEO and CFO sentiments. So what are the implications of this environment from a Deals team perspective?
Companies are figuring out how to adapt to a new M&A market that features both lower valuations and more restrictive capital markets. At the same time, however, CEOs and CFOs understand the need — and indeed pressure — to drive growth and continue to transform their businesses. Deal professionals are having to rethink their playbooks to align with a very different environment from that of the last 10–12 years. Jeff’s cohorts are working to find alternatives to accomplish their goals outside of the general M&A techniques they’re accustomed to.
according to a 2020 Mercer survey examining executives’ confidence in their abilities to adapt well to the “Future of Work.” Ask tough questions about talent and skill-related elements. What critical skills do you need from leadership and the workforce? What quantity of those skills do you need, and where? What behaviors and cultures do you need from both leadership and the general workforce?
Asking these questions as soon as a target company is identified means there should be enough time for a human capital component to be included in the deal thesis. Due diligence should then unearth any related issues that test this thesis. Companies should reflect the resultant learnings and insights in their financial model and reshape their integration plan, as needed, to improve its chances of success.
Jeff suggested that in many deals, there is a disconnect between the timeframe and level of assumed growth, and an understanding of how culture-related flashpoints can be a distraction. Failure in integration exaction usually stems from this misalignment.
Their focus, according to Devanshu, has always been “strategy-led origination” — in other words, avoiding situations where a transaction under review is driving a company’s strategy, or where it is fitting the strategy around the transaction rather than the other way around. “Putting the cart before the horse” happen all too often in M&A, he said.
Devanshu is currently working on how to combat this trend over the next 12 months, improving his team’s services in the process. They plan to build pipelines and new transactional solutions to accelerate these ideas and increase the number of deals made their end.
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