Why synergies are CFOs’ best bet for creating value in 2022

Why synergies are CFOs’ best bet for creating value in 2022

By Clara Cutajar, Deals Partner, PwC Australia and Chris Dodd, Assurance, Strategy & Markets Leader, PwC Australia

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Last year was a record-breaker for deal making on a global scale, when deal values exceeded US$5 trillion for the first time. And yet in 2022 there’s still a significant amount of dry powder in the market, and competition levels remain sky-high for investments.

What, then, do CFOs and finance leaders need to know in order to navigate the next 12 months?

Our recent M&A outlook webcast covered upcoming trends, recent lessons learned, and what to do right now to bring value to your entire organisation. It was the fifth session in the G100 PwC ‘Future of the Profession’ series and, with an expert panel of several senior finance leaders, possibly our most practical yet.

The forecast for CFOs

The good news is that M&A activity is set to remain high in most sectors. Activity is being driven by tailwinds such as demand for digital capabilities and the impact of ESG. Not to mention the fact there’s still plenty of capital still looking for a home. This, in turn, is driving competitive transaction processes and boosting valuations. However, headwinds such as geopolitical tensions, supply chain disruptions, and fears around inflation and interest rates are beginning to have an impact.

So how will these trends play out in Australia? Locally, we’re sure to see more of the following:

1)     Public-to-private activity

We’ve seen plenty of public-to-private transactions locally, and some absolute mega-deals, such as Sydney Airport and AusNet. Expect this to continue. At the same time, and in order to avoid playing roulette in increasingly competitive processes, we’re seeing more bi-lateral deals.

2)     Government partnerships

Following COVID-19 stimulus payments, government debt is at an all-time high. This is giving rise to the potential for unprecedented opportunities for the private sector to partner with the government. Think: asset sales, capital recycling, contestability of services, or joint ventures.

3)     Acquisitions driven by digital capabilities

Companies looking to acquire digital capabilities will drive deals activity, especially when it comes to divestments of non-core assets to reinvest in higher-growth areas.  

4) The ESG effect

Companies are actively looking to align their M&A strategy and their ESG goals (seen recently when Shell acquired Meridian Energy’s power retailer, Powershop). ESG is shaping operating models, as well as the ability to transact, and Australia is trailing the rest of the world.

5) Initial public offerings (IPOs)

At one stage in 2021, there were more than 15 IPOs being worked on in the market simultaneously. Now, however, there’s some uncertainty creeping into the market in response to global insecurities, and, due to high multiples being paid in transactions (and the risk this brings to IPOs). In short, IPO activity is set to slow in the remainder of 2022, however, we should still expect above-average activity.

Seek synergies for value creation

With these trends in mind, where will value lie in the year ahead?

Synergies are your best bet for value creation right now, according to the panellists at our webcast.  They explained that, in a market awash with capital, the price and cost of capital are not necessarily going to drive value, meaning the smart money is on synergies.

Webcast attendees also heard how successful M&As are often grounded in synergies. For instance, achieving high operating leverage by having the whole organisation on a single operating platform.

What does this mean for CFOs and finance leaders?

Quite simply, when you look at new transactions, the first question you need to ask yourself is: Will this be of strategic value to my company? And if the answer is yes, then the second question becomes: How much of these synergies will we have to ‘pay away’ in the purchase price?

It’s important not to overestimate your capability and the time it will take to achieve those synergies. The pace of synergy realisation is more important than ever and your due diligence process must remain robust. This is where good planning really comes to the fore.  As does effective communication with employees.

In fact, some senior finance leaders don’t even use the word ‘synergies’ internally. Instead, they talk about an ‘alliance for growth’, which is all about the future, and about bringing businesses together. Most of all, it’s about ensuring employees are part of the journey.

 

Contact us

Clara Cutajar

Partner, Deals, Sydney, PwC Australia

+61 414 491 683

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Chris Dodd

Partner, Assurance, Melbourne, PwC Australia

+61 418 316 892

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