The path to thrive: M&A strategies for a brave new world

In 2021, companies spent an unprecedented $5 trillion on M&A, the highest activity ever recorded. Such unprecedented peaks meant 2022 had a hard act to follow and, despite the challenging market conditions, closed with $3.3 trillion worth of deals, on par with the decade-long average.

The emerging post-pandemic global landscape seems a world away from the past. Corporate leaders need to adapt their organizations for these systemic and structural changes, against a backdrop of rising global inflation, interest rate hikes, supply chain realignment, increased regulatory hurdles, and renewed activist pressures. As part of this reset, they should also anticipate greater public scrutiny of corporate environmental, social, and governance (ESG) responsibilities and investor expectations, to deliver profits with purpose. 

How M&A can shake up and stabilize businesses

The past few years have demonstrated M&A strategies are firmly cemented as a fundamental part of the corporate arsenal, both in defense to preserve value and in offense to drive growth. The M&A markets are also highly resilient. Our analysis of the nearly 40 years of historical M&A data shows adverse market conditions are a short term drag. M&A markets tend to recover quickly from crisis conditions once uncertainty subsides as deal-makers rapidly adapt to the new environments and prefer to create their own momentum.

The past and the present

M&A has been a powerful tool in business to expand capabilities and remain viable. We believed that recovery would be asymmetrical and that sectors would have to reinvent themselves.

Back in 2008, the great financial crisis resulted in a sharp decline in M&A, and the markets did not recover until 2014. One of the main attributes of this market contagion was that it affected each sector fairly uniformly and therefore recovery cycles evolved over time, given the symmetrical nature of the underlying causality. However, this time around, the pandemic caused an asymmetrical market contagion as each industry and sector was affected differently. Varying recovery velocities of leading and lagging, depending on the degree of impact and organizations’ corresponding abilities to do something about it.

As a result, markets came roaring back, and in 2021–22, more than $8 trillion worth of deals were announced, as companies took advantage of their strong cash reserves and favorable debt markets to make M&A central to business recovery. 

Based on our research from the original “Charting New Horizons” report, we evolved our M&A framework based on defensive and offensive deal archetypes that are required to build resilient business models, accelerate transformation, unlock the potential of ecosystem alliances, and capture market leadership. Redefining M&A strategies in terms of these choices will bring much-needed clarity of purpose while paving the path to thrive.

The path to thrive will be defined by two distinct capabilities: resilience, in which a company needs to secure its foundations, rapidly adapt, and emerge stronger; and transformative growth, in which it needs to reinvent the business to succeed in the new realities.

Defense and offense

Resilience isn’t about simply being able to weather changes. A different form of resilience may prioritize being agile and adaptable, which can be difficult to focus on when merely focusing on survival. A defensive M&A strategy can help to build this resilience in a few ways: delivering value, optimizing portfolios, and strengthening positioning.

For example, supply chain issues have been a recurring challenge over the past couple of years. To address that, a company could consider an acquisition of a supplier. This happened recently in response to the global semiconductor chip shortage crisis. A major chipmaker acquired a specialist chip contract manufacturer to boost production capacity and secure its customer base.  Companies could also seize on opportunities through co-investment and partnership opportunities with suppliers, including with private equity firms. This kind of collaboration can facilitate transformation by pooling resources and expertise, which in turn helps to build resilience.

Similarly, offensive M&A strategies are also a way to capitalize on opportunities. However, an offensive strategy is grounded in gaining momentum rather than building resilience. Corporations could do that by transforming business models, collaborating to stay competitive, and capitalizing on cross-sector convergence. Many opportunities nowadays need to be considered through the lens of whether to build, buy, or collaborate to achieve a goal. These dynamics have necessitated the expansion of traditional M&A strategies to include collaborative structures such as joint ventures, partnerships, and ecosystem alliances that are not bound by sector boundaries, instead focusing on common purpose and values.

For instance, environmental, social, and governance (ESG) goals often can’t be achieved unilaterally and demand collaboration; it can take multiple collaborators to make an impact. A useful example of this is the decarbonization of the aviation industry. To tackle this goal, an aircraft manufacturer, industrial gas supplier, and airport operator formed an alliance to promote the use of hydrogen infrastructure. Although this isn’t necessarily an example of a traditional merger or acquisition, it captures the positive potential of this broadened vision of M&A.

Source :  “The path to thrive: M&A strategies for a brave new world”, Deloitte 2023

By Pornpun Wesaratchawet
Partner | Financial Advisory - M&A Transaction Services
Deloitte Thailand