M&A – A NEW MANTRA FOR SURVIVAL?
M&A activities have always retained the interest of the people, each year some of the prolific deals gain worldwide attention and the effects of many of those deals can be experienced globally. According to the 2017 M&A report by BCG, around 26,000 deals were completed worldwide in 2016; which is almost similar to the number of M&A deals we witnessed in the year 2015 and close to the M&A disruption years of 1999 when we witnessed $3.317 trillion worth of deals and 2007 with $3.78 trillion worth of deals. Aggregate total value of the deals in 2016 was $2.5 trillion, which on par with 2015. While M&A can be driven by varied objectives from synergies to taxation benefits, it’s important to note the factors currently driving the transaction volume as per most research reports.
Factors that drive M&A:
- Technology: Almost 30% of the total $2.5 trillion of completed M&A transactions in 2016 comprised of high-tech deals represented. Approximately 70% of all tech deals in 2016 involved buyers from outside the tech sector. Tech isn’t just for tech companies anymore.
- Economic & Political uncertainty
- Divestments: Companies are actively divesting assets to refocus on their core businesses and bolster post-acquisition balance sheets.
- Low GDP growth in mature markets: Forcing companies to look for opportunities outside in faster-growing markets.
- China: China’s growing appetite for acquisitions seems never ending
One factor that typically goes under the radar is the need to simply survive in today’s competitive market. Survival here not just applies to smaller or medium sized companies who do not have the necessary resources to continue running the business profitably under competitive or financial pressure, but also large businesses which are obligated to consider the inorganic route to stay in the game.
For start-ups, survival may be a challenge right from the day one. In fact, 82% of the failed businesses did so because they experienced cash flow problems or ran out of money eventually. Partly, this is driven by the entrepreneurs’ passion (and venture capitalists’ vision) to build a business plan for at least 5 years at the end of which there’s an ambitious exit event awaiting that would potentially give an exponential return. If only 50% of the businesses are going to survive the 5th year in business, this vision is flawed in one out of two cases. Even if the business does survive beyond this time frame, the risk remains of ever-changing technology landscape that could make a business obsolete over-night. Many start-ups themselves are now acquiring (or acqui-hiring) other start-ups to consolidate technology, capabilities, and resources, thereby increasing the probability of long-term success and in some cases, simply to continue running.
To keep the business momentum going and to be at the forefront of technology or business model and innovation, the M&A route is vital. Large businesses need to grow fast, or else they’ll suffer a slow death. For instance, if manufacturing businesses do not adopt the robotics or IoT revolutions, sooner rather than later they will go out of business, as it will not be able to keep up to the pace of its competitors or bring down costs to an acceptable level. Industry competition has always been a fact of life, but even more so with the currently-high stock market valuations, low borrowing rates and cash-rich companies or private equity funds backing them. Pseudo-private equity or ‘buy-and-hold forever’ type of strategic acquisition companies are running their business model itself focused on M&A and synergetic growth, building verticalized conglomerates only through acquisitions.
It is not always struggling businesses that need to worry; strong businesses are also vulnerable to potential takeovers. While defense strategies of poison pills, golden parachutes, etc. have always been around, hostile takeover or forceful submission to potential acquirers can only be stopped to a certain extent. In Canada, six hostile bids were launched in 2016, compared to eight, nine, and eleven in each of the prior three years, and a high of 13 in 2011. Many brick and mortar businesses and conglomerates are under pressure from shareholders to deploy the excessive cash built over years on their balance sheets towards growth and innovation and face a “problem of plenty”; prime examples are IT services and pharmaceutical companies. This might lead to over-the-top spending or needless, hurried acquisitions not fitting their growth trajectory.
Technology has lowered marketing and distribution barriers to entry, while consumers have increasingly come to expect a faster pace of innovation and a higher degree of perceived customization. No longer can large consumer-focused companies rely on brand loyalty and the resulting pricing power; they’re under attack by fast-growing digital-first start-ups backed by venture capital funds 10x’ing their way to the bank within 6-8 years.
In the vast history of corporate affairs and commerce, M&A has always held a pristine position. The examples of the first M&A deals can be traced to the 19th century, during the time of ‘The Great Merger Movement’ from 1895 to 1905. During this phase of the corporate history, most of the small firms in the US market merged with the large and dominating players in the market. These are the initial records of the first M&As in the history of commerce, which was influenced by the desire of the corporate to keep the prices of the products high. This had resulted in the monopoly of the large firms in the US market and the end of existence for most of the small companies.
It’s a fish-eat-fish world of M&A and only the fittest will survive whether your business is small or a multinational. The concept of mergers and acquisitions has been around in the industry for ages, and has been used by the corporate in accordance with the industry dynamics and their business strategy. Whether companies use the path of M&A for growth or as a means of survival, it will just be an addition to the long and varied history of the commerce. The age-old mantra of M&A is not a nascent or a foolproof concept for the survival. As always some of the deals will see the shine of the day and will get a much-needed boost to their business, where as remaining will add to the long history of failures.
Author: Mr. Damodar Baliga, Head – Corporate Innovation Engagement, CBA