Pandemic’s effect on workplace adds complexity to M&A valuations

by | Aug 19, 2021

Three vital factors for private equity companies


During the depths of the pandemic and the economic shutdown last year, analysts who specialized in valuing companies for mergers and acquisitions were having something of a crisis of confidence. The economy had shut down; the economic outlook was grim, and no one really knew what a recovery would look like—would it be a V, a U, a W, a K? It all had the effect of putting a chill on mergers and acquisitions. After all, it’s hard to reach a deal when you can’t value a company with any real confidence.

A year later, the market for mergers and acquisitions has recovered, with the number of deals, and valuations, rising. But for analysts, something has changed. It’s not just that valuations are higher, but also that the way companies get to those loftier valuations has changed.

Those companies that have taken care of their workers, embraced technology and adjusted to a rapidly evolving marketplace have been rewarded.

It’s a nuanced picture, though. Is the company one that could shift to remote work, like an advertising firm, and maintain its business? Or does it depend on workers being at a plant, like an automaker or a meatpacker? Not all companies have shared equally in the recovery, making valuations a difficult exercise.

RSM has identified three factors that are influencing company valuations as the economy recovers:

  • The workers: What kind of labor do your employees perform? Do they need to be on-site?
  • The technology: Have you made investments in technology that have enhanced productivity, engaged customers more effectively and enabled remote work?
  • The culture: Does your company value its workers and promote a strong culture?

The workers

Valuations often come down to the industry in which a company operates, the type of worker it employs, and the degree to which it can transform its business. For example, the health care industry has a highly skilled labor force that works predominantly in person, even as telemedicine becomes more common. The manufacturing sector, conversely, has a high number of low-skilled laborers who work in person, at a plant.

In each case, companies during the pandemic had to take precautionary measures that allowed them to continue to operate. So in an advertising firm, for example, companies shifted to remote work, and many of them barely missed a beat during the pandemic. But manufacturers had a different challenge—they needed their workers to be on-site, which meant making investments in protective gear, allowing for social distancing and improving their cleaning protocols, among other precautions.

Companies that took a thoughtful approach to these risks and opportunities have been able to unlock potentials in their workers, leading to improved productivity and creating more long-term value.

For example, employers who recruit high-skilled talent might lead to breakthrough innovations that can add new product types and service solutions and will drive company revenues. These companies might also benefit from opportunistic recruiting practices, employment benefits or professional development programs.

But other companies that lose the war on talent will suffer from shortages of labor, which has been prolonged by COVID-19-related safety concerns, changes in workplace preferences and extended unemployment insurance. Whatever the circumstance, companies that are constantly evaluating their employment practices and the market will either gain or lose value during deal-making.

The technology

It’s no secret that those companies that managed their staffs effectively are now poised to benefit from the new efficiencies for years to come. Banks are a case in point. For both their customers and their workers, senior executives at banks had to think of new ways to keep their businesses running smoothly. For customers, this meant helping them switch to online banking—a difficult transition for many who are used to visiting their local branch. For workers, it meant performing their jobs remotely and having the technological infrastructure to do that.

Manufacturers are not exempt from these advancements, as artificial intelligence and automation gain momentum. Jobs with a higher office proximity—like manufacturing plants—will have the greatest chance of dislocation through artificial intelligence and automation. It can be a costly transition, but those companies that have invested in automation are those that are seeing higher valuations.

The culture

Other factors are more difficult to measure, like company culture or security and privacy. Company culture is a key component in the success or failure of M&A, but gauging employee morale, talent and development is difficult. Companies with an outstanding culture might be assigned a lower cost of capital while those lacking it might be assigned higher rates.

During the pandemic, certain industries were affected differently by changes in workplace engagement. What is clear is that companies are rethinking how, where and why we work, all of which will have a lasting impact on a company’s culture, and, ultimately, valuation.

The primary impacts to valuations tend to be through the reduced office footprint, remote work staff and productivity. Companies have begun to reduce leased office space as the workforce transitions to a more flexible schedule, allowing permanent or flexible work arrangements to become the norm.

As the workforce becomes more geographically diverse, often in markets with a lower cost of living than the company’s headquarters, employers are changing the way they hire and compensate employees. Companies across industries are offering their employees permanent relocation options that often carry adjustments for market rates in those new locations. Others are expanding their recruiting efforts into markets that were previously untapped given the physical distance.

Further, many companies in the consulting and business service industries have seen an increase in the productivity of their workforces. As the lines between work and home blur, and travel has been reduced if not eliminated, many employees are working more and increasing the margins of their employers.

The takeaway

The decentralization of the workforce and commoditization of talent is bound to be front and center as sellers try to take credit for changes in the workforce composition that increase the bottom line and earnings. Buyers should be skeptical about the sustainability of that approach, particularly in the instances of increased productivity driving growth.

In the end, companies that invest in their workers, improve their efficiency through digital technologies and focus on improving their workplace culture will reap the rewards through higher valuations.

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This article was written by Andrew Fedele, Anthony DeCandido and originally appeared on 2021-08-19.
2021 RSM US LLP. All rights reserved.

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

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