Lim Yau Boon

Lim Yau Boon

M&A: The COVID-19 Effect

As the number of COVID-19 cases continues to escalate, the pandemic has tightened its grip on financial and business markets worldwide. What started as a health and humanitarian challenge now impacts not just every country across the globe but also every business sector.

Lockdowns globally have resulted in MNCs and SMEs alike facing severe supply chain disruptions and seemingly insurmountable operational costs. With its disruptive nature, COVID-19 is forcing investors and organisations to re-think and explore ways to re-structure their business and deploy, or even shore up, capital. This is affecting short and long-term M&A activity.

Bankruptcies are already relatively high across several sectors. Governments in Asia that may have temporarily been able to support companies are not financially able to do this long term. And even the more affluent countries such as Singapore, Hong Kong, Japan, Korea, and maybe China, are struggling to both control the virus and stimulate economies. 

M&A is therefore a possible strategic growth tool for companies. Still, currently, despite good prospects for strategic bolt-on acquisitions, companies are reluctant to instigate such actions as they wait to see how the coronavirus and the economic downfall play out. Most are merely trying to hold the business together and spending time on business continuity, risk management and compliance. The few multinationals that started the M&A process prior to COVID-19 are currently just focusing on due diligence, including in-country checks, remote data collection and financial analysis. Most activity at the moment is contingency to keep things on track.

With forecasts by The International Monetary Fund that we are about to go through the worst global recession since the Great Depression, businesses are under extreme stress from the financial system and the prospect of an escalating debt situation. Companies are now reassessing their business outlook and scrutinising their balance sheet. They are reviewing their acquisition list, re-evaluating and re-valuing their acquisition targets. While there are no clear distress assets as yet, a lot of them are under intense pressure. New opportunities will be emerging.

If a company did decide to move forward with any M&A activity, it’s not as simple. For example, a large percentage of companies in Asia are family-owned, and buying them out, even if they were “financially available”, could be hampered by governance issues. Also, valuations are hard to complete as there’s a significant mismatch between Wall Street and Main Street, so the equities market and the actual state of business are hampering pricing assumptions and revenue projections.

More importantly, businesses now realise that they need to accelerate the acquisition of new competency to be future-ready. That’s definitely a big shift in mindset. Future-ready is being able to manage future disruption, either by a pandemic or by digital disruptors.

COVID-19 impact also created acquisition opportunities due to distressed assets and those in need of a cash injection.  Those that were struggling pre- COVID-19, will become prime targets. A good example is Amazon acquiring American Department Store chain JC Penney in the US.  That is an interesting play for Amazon within the retail sector. Once profitable companies have now become key targets, and not necessarily from direct competitors.

M&A can play a role in preparing and accelerating a recovery but, as mentioned, it’s early days. Multinationals with a significant presence in Asia are currently just looking at prospects to partner or target but not acting as yet. M&A is an attractive way to compliment or add to an organisation’s product or service portfolio; or can improve efficiencies and productivity, which boosts market share. It can also play a role in accessing innovations or business areas that are adjacent to their core business. However, to act, companies are going to have to assemble teams quickly that can spot opportunities and flex to identifying what their needs are in terms of acquisition.  This isn’t easy in such a fluid and changing market.

Whatever the intended M&A activity, an integral part of the new norm is being future proof and ensuring operation resiliency, which comes down to its people and processes, and business continuity.  How do you continue to engage your customers and get access to suppliers? Lastly, companies must have the ability to pivot, to thrive in circumstances that are unpredictable in a ‘black swan’ situation.

The traditional acquisition (90%) strategy, will have to be relooked into, such as the like-for-like (Competitive) category, channel expansion (Prevention and Reach), or adjacent business (Vertical Integration, Strategic Control). The trend of acquiring new capabilities and platforms will not only serve the company needs but will likely help pivot and transform companies with new business model capabilities and have the potential to become a new business with a new revenue stream.

Instead of acquiring competitors, they will start to extend the new capabilities and services to create new customer segments, in a space that they are familiar with. These new competencies are likely to be future-ready against business discontinuities. The challenge is, of course, having the expertise to identify the acquisition targets with right capabilities, and their availability and fair value.

An example of this is an F&B operator looking to acquire ordering platforms and distress F&B assets, to pivot beyond traditional food services into real estate master tenancy, food ordering platforms and last mile delivery. This is instead of using the likes of Deliveroo as they need to redefine themselves from being just an F&B operator to thrive. 

COVID-19 may not go away anytime soon, and although life and business will go on, it will be with more caution than ever before. Those companies that can acquire today will have to look beyond just the now but how any M&A activity will help them boom in the next phase and into the future.

Follow our next article in the series which looks at the drivers for the new norm? And what would be the new paradigm for leaders and their organisations to be future-ready?  


For more in-depth information listen to our recent webinar “The Future of M&A: The Business and People Imperative” webinar organised in conjunction with BritCham Hong Kong on 30 June 2020 with panellists Jessica Pyman, Partner, Control Risks; Yau Boon Lim, Senior Partner, Disruption Management, Asia Pacific, Lim-Loges & Masters; and Maarten Kelder, Executive Vice President, Strategy & Corporate Development, Zuellig Pharma. This is the first article from their discussions.

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