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The COVID-19 pandemic has brought about significant shifts in individual and group behavior, business practices and social norms. These shifts are influencing consumer decisions and business operations and reshaping the types of mergers and acquisitions (M&A) and other deals companies will likely pursue in the months and years ahead. Companies that successfully execute deals usually excel in finance, strategy, operations and process management. But the pandemic has shown the need for these core skills to expand, with sociology and psychology also being considered in reshaping M&A corporate strategies and tactics.
As history has shown, crises prompt change. World War II led to a surge in women’s participation in the labor force. The September 11, 2001 attacks altered transportation and security policies around the world. China’s 2003 SARS outbreak changed consumer attitudes toward shopping, leading to the rise of Chinese e-commerce giants while accelerating the launch of digital payment platforms.
The economic and sociological consequences of COVID-19 will likely endure for years as well. Below, we explore six fundamental changes in the M&A deals environment we believe will persist in the long term:
There may have never been a time where concepts of social space have been more heavily debated. It’s also evident that physical space and social interactions are intertwined into the very fabric of our society. This has created a wide range of impacts, including early signs of a reversal in decades-long urbanization trends. Homes have become the nexus for education, entertainment and most family activities.
Nowhere is the debate around space more apparent than the rise of working from home. Traditional offices won’t become totally obsolete, but working from home will likely be semi-permanent at many businesses.
Deal implications
One of the most consistent business concepts of the last 50 years was the drive for cost effectiveness, with its greatest manifestation the development of global supply chains. These chains became the engine for delivering low-cost goods throughout the globe — not only reducing labor costs but helping build single sources of supply that created further cost advantages through scale.
For many companies, the drive for cost effectiveness led to reliance on China, due to its advantages in both cost and scale. Geopolitical tensions, fueled partly by the rise of populism, have challenged the relationship with China over the last several years. Supply-side vulnerabilities during the pandemic gave this shift additional momentum, further driving doubt into the concept of single sourcing. The fact that production of many critical goods, such as essential medical supplies, is concentrated in China exacerbates these tensions. As a result, many companies are focused on supply chain vulnerabilities.
Deal implications
The shift in shopping patterns suggests consumers will likely be more selective — not only with what they choose to buy, but also how they prefer to shop. As health risks subside, consumer tastes and preferences are becoming more uneven and complex. For example, some consumers are more willing to fly while others won’t book a reservation unless they can easily cancel. These, and other changes in consumer behaviors may emerge differently across age groups, making it even more important to segment individual markets when making business decisions.
Such trends could have wide-ranging deals implications. Investors will likely place a higher value on companies that can quickly adapt to new consumer behaviors, and these adjustments could take shape in different ways. Those businesses willing to innovate to meet consumer needs may not only build customer loyalty but also be strongly positioned to take market share in the years ahead. Given the sweeping impacts of the pandemic, companies that operate with the common good in mind — such as creating a safe environment for employees and customers — will likely come out ahead.
Deal implications
Economic, social and political crises often drive shifts in public policy. For example, the 2007 financial crisis led to broad regulatory changes in the US and globally.
But even as citizens increasingly rely on today’s biggest tech companies for work, education, healthcare, entertainment and countless other services, US lawmakers remain concerned about the dominance of tech giants. These opposing yet intertwined forces will likely complicate and shape debate over antitrust and data privacy rules going forward.
Deal implications
Amid nationwide demonstrations for social justice, many have realized there’s significantly more to be done to end systemic racism. This came as the pandemic exposed health disparities among Black and Latino communities. In addition, there has been more focus on the threats of climate change to companies and, by proxy, the financial markets.
At the corporate level, shareholder and customer scrutiny of a company’s labor practices, talent management, product safety, risk assessment, crisis response and data security has never been higher, magnified in large part by social media. While the bottom line remains important, executives and boards are increasingly reviewing board diversity, executive pay, business ethics and other elements of environmental, social and corporate governance (ESG).
Private equity firms can also expect to see increased focus from limited partners and potential investors on how they’re addressing these risks in future deals and ongoing investments. Companies with management practices that consider broader industry, regulatory and societal risks are more likely to drive long-term sustainable performance, shareholder value and greater investment returns.
Deal implications