Low valuation, tech adoption may boost M&A activities


MERGERS and acquisitions (M&A) could be on the rise as businesses are looking for alternatives that would enable them to survive through the tough economic conditions.

Players who identify M&A initiatives as part of their long-term growth plans look set to gain a competitive advantage and larger market share, says Affin Hwang Investment Bank Bhd deputy group MD Yip Kit Weng.

“The current environment gives rise to opportunities as company owners with struggling operations or facing financial difficulties may look for parties who can buy them out,” said Yip.

Last October, research and analysis consultancy Oxford Economics expected the number of M&A transactions in Malaysia to increase to 221 deals in 2020, from an expected 218 deals in 2019.

However, the Covid-19-induced Movement Control Order in the country sent dealmaking into a lockdown.

News relating to M&A has surfaced many in the past, among the most recent being Berjaya Corp Bhd’s proposed takeover of Singer (M) Sdn Bhd for RM536 million from Tan Sri Vincent Tan and possible reverse takeover of ConnectCounty Holdings Bhd by S5 Systems Sdn Bhd.

The US$10.6 billion (RM45.37 billion) takeover of Tesco operations in Thailand and Malaysia by Charoen Pokphand Food Ltd Public Co Ltd led by Thai billionaire Dhanin Chearavanont was the largest deal in Asia ex-Japan in the first quarter of this year.

Sime Darby Bhd made RM300 million following the disposal of its 30% stake in Tesco Stores (M) Sdn Bhd to CP Retail Development Co Ltd.

With the Covid-19 pandemic hitting deal-making, potentially lower valuations during an economic downturn make financially struggling businesses attractive for potential buyers as businesses seek strategic financial merger partners to ensure their survival during this time.

Yip noted that a change in the overall landscape will also prompt businesses to seek some form of enhancement and diversification, in which some of the smaller businesses might be dabbling in.

“This will somewhat form a strategic fit, especially if these smaller businesses are looking for growth capital and immediate growth opportunities,” he said.

The rapid change of technology and its impact across all sectors, services and industries is also viewed as another key factor driving M&A, said Yip.

Even prior to the Covid-19 crisis, the effects of technological change on the global economic structure have created an immense transformation in the way companies and nations organise production, trade goods, invest capital, and develop new products and processes.

Buyers with available cash reserves and funding capacity will be eyeing companies as investment opportunities during a low cycle, particularly in companies involved in personal protection equipment, rubber gloves, and pharmaceutical companies in the global markets, said Yip.

There have been a lot of interests in companies who have an existing focus on healthcare, digital financial services, cloud connectivity and online distribution to consumers, and these companies have seen demand for their core products and services more than doubled during various lockdowns/shutdowns across the globe, he added.

“Machine learning and artificial intelligence underlie much of the explosive growth. Certain sectors may require the consolidation of fragmented players as well.

“This is also true for companies involved in consumer staples such as food supplies as these are essential goods and seen as defensive industries,” he said.

However, companies looking for deals are expected to weigh on market comparables, potential financial growth and prospect before embarking in such transactions.

“Generally, low valuations due to depressed share prices and low asset prices will mean that it makes sense for the controlling shareholders to buy out the minorities and privatise the companies,” he opined.

Lee said the difficult operating environment has led many companies to report lower earnings or even losses.

“Privatising these listed companies will allow the controlling shareholders to restructure or reorganise them for the future.

However, determining the valuation of such companies for privatisation is key as minority shareholders are increasingly well informed and able to assess privatisation proposals to determine if they find the offer palatable, Yip added.

M&A transactions done during the restricted movement measures in various countries could also likely change.

“It will require careful and detailed planning as to how due diligence and negotiation activities are to be effectively carried out. I don’t think this is a major impediment that will limit M&A activities, but it is more on careful planning and looking at alternative approaches to make things work,” he said.