/ The expected motives behind increased M&A activity post COVID-19 are:
- Value creation
- Acquisition of assets
- Increase in financial capacity
- Succession planning
As global economic activity starts to pick up and things slowly move toward the “new normal”, many business
owners and managers will be thinking about ways to redesign their businesses to make it future-proof. These
considerations will depend on a number of factors including the industry in which the business operates, the
current stage of the lifecycle of the business and the risk appetite of its owners and management.
Typically, these considerations will include:
- / Will the company be able to survive another unexpected crisis?
- / What are the emerging trends in the industry that the business operates in?
- / Will the company continue to remain competitive and grow?
- / Does the business have access to the right people and assets to remain competitive and ensure growth?
- / Do I want to continue to be involved in the business or is it time to inject new energy and ideas into
The responses to these questions will lead to an increased appetite by business owners to enter into M&A
Described in more detail below are the expected motives for increased M&A activity in a post COVID-19 world:
1. Value creation
Companies usually undertake a merger under the premise of increasing shareholder value. It is expected that
the consolidation of two complementary businesses will result in “synergies” that increase the value of the
newly merged group. It essentially means that the value of a merged company exceeds the sum of the values
of two individual companies.
There are two types of synergies:
- Revenue synergies will improve the company’s revenue-generating ability through market expansion,
product diversification and R&D activities.
- Cost synergies will reduce the company’s cost structure through economies of scale (e.g. elimination of
certain duplicate costs) and through access to new technologies.
A company may use a merger to diversify its business operations by entering into new markets or offering new
products or services. Diversification into a number of industries or product lines can help create a balance and
natural hedge for the company when spending patterns shift due to changes in the economy.
3. Acquisition of assets
A merger can be motivated by a desire to acquire certain assets that cannot be obtained using other methods.
Merger transactions are often initiated to gain access to assets that are unique or to assets that usually take a
long time to develop internally (e.g. new technologies).
4. Increase in financial capacity
Every company faces a maximum financial capacity to finance its operations through either debt and/or
equity. Companies lacking adequate financial capacity, on a separate standalone basis, may initiate merger
discussions with complementary businesses as a merged entity may be able to secure a higher level of
funding. The increased financial capacity can be utilised to further grow the business.
5. Succession planning
This unexpected crisis has forced many business owners to come to the realisation that it may be a wise
decision to sell down some or all of their shareholding in their businesses. For many business owners it is
not only about realising maximum value when they exit their shareholding; they are also concerned about
the continued success of the business and the well-being of the employees that will remain behind. One of
the responses to address this risk is a “Management buyout”. Management buyouts occur when a team of
managers and executives work together to buy a business they work for. It is a simple way for existing owners
to find willing and knowledgeable buyers and gives employees the chance to step up and progress their
careers. Not only are Management buyouts a faster and easier sale, the seller also gets peace of mind that
their business is being passed onto a group they know and trust.
Should you need further clarity or assistance with implementing any of the above, do not hesitate to
contact any of our Partners.