BY KEOY SOO EARN
No country, and indeed, no business, will be immune to Covid-19’s impact. In these uncertain times, it is understandably more difficult for business leaders to make decisions that look beyond the horizon, and it is no surprise that plans for mergers and acquisitions (M&A) take a backseat as businesses grapple with the pressing urgency to simply survive.
The number and value of deals in Singapore and Southeast Asia have decreased as a result of the pandemic. In 2019, Singapore saw 140 deals with an average deal value of about S$231 million compared to 10 deals with an average deal value of about S$45 million in the first half of this year. Southeast Asia saw 461 deals with an average deal value of about S$203 million in 2019, compared to 40 deals with an average deal value of about S$169 million in the first half of 2020. We can expect that M&A activity will continue to decline in the next six to 12 months.
While the current outlook in the region may seem grim, the trends that are emerging – and accelerating – give us a glimpse of different opportunities in different sectors that can lift businesses out of survival into recovery, and eventually to thrive post-Covid-19.
Certain key trends in the pre-Covid-19 world have accelerated during the pandemic, for instance:
The above trends suggest that the Covid-19 pandemic will drive structural change. Travel preferences, attitudes towards crowds and levels of health-consciousness will likely be re-evaluated, and the future of work may change – with businesses placing greater scrutiny over their global supply chains, increased use of technology to replace business travel, and working-from-home arrangements for employees will be more permanent. Also, the accelerated use of technology may support recovery and higher productivity in the long term.
A significant share of industries is estimated to experience negative growth in output over 2020 due to Covid-19, reflecting the widespread impact of the current health and economic crisis as well as the broad reach of the Singapore government’s “circuit-breaker” measures. Industries considered “non-essential” during the circuit-breaker period, that are less able to make use of e-commerce and digital delivery, and less prepared to support work from home strategies will be more impacted.
A recent Deloitte research has ranked the top five industry groups in Singapore that are most impacted on an Industry Impact Index, measured by their estimated growth in industry output and their readiness for the new normal (Figure 1). In the same report, industry groups are also ranked in a Policymaker Priority Index which scales the most impacted industries by their degree of integration with the broader economy (Figure 2). Industries that contribute more to economic growth, support more jobs, and are more integrated with other industries may be higher priority for receiving government support.
Figure 1 Industry Impact Index
Source: Deloitte Southeast Asia Financial Advisory
Figure 2 Policymaker Priority Index
Source: Deloitte Southeast Asia Financial Advisory
The businesses within industries most impacted should have greater impetus to take decisive action to address their vulnerabilities and ready themselves for the future. These actions could involve diversifying the sources of revenue or sales channels to strengthen resilience to external shocks, such as those currently being experienced, or investing in workforce training and new technologies to improve adaptability to the structural changes that will define the next normal.
In this environment, we can expect to see increased distressed M&A opportunities. Enterprises and private equity firms with available funds set aside for acquisitions and investments will be well-positioned to enter the market at a lower asking valuation than pre-Covid-19 times. However, these acquisitions and investments will require the investor to have access to expertise to turn around the distressed business.
Sectors that would likely present distressed M&A opportunities include:
We are also noticing that investors are moving from an “acquire for growth” to “acquire to transform” model. We anticipate a different approach to M&A to emerge, where transformation is pursued simultaneously with an acquisition. Companies that take advantage of this can implement new business and operating models for a combined or separate entity, and drive significant revenue growth and sustainable margin improvement.
As we ride out the Covid-19 wave, we envision the following focus areas of M&A activities where enterprises may look to “acquire to transform” and be well-positioned for the next normal:
The post-Covid-19 M&A environment will be materially different. Corporate purpose that intertwines sustainability with commercial success, resilience and building trust across a wide coalition of stakeholders will be the cornerstone of deal-making. Well-planned bold moves will help companies recover and transform themselves to augment their competitive edge and redefine market opportunity while maximising value creation and accelerating time to value in the new world.
Keoy Soo Earn is Regional Managing Partner, Financial Advisory, Deloitte Southeast Asia.
This article was first published in the ISCA Journal. The original article may be viewed at the following URL: https://journal.isca.org.sg/2020/08/20/ma-in-covid-19-times/pugpig_index.html