Kuala Lumpur, May 2021 – March 2020 is a month that will be remembered by every Malaysian, if not just for the next few decades but in history. Very few anticipated the severity of a flu-like disease that was making its way across borders and overpowering the immunity of masses worldwide. Covid-19 was indeed a shocker and it had a point to prove – that it is not easily defeated.
More than a year later, despite major efforts by leading scientists and medical practitioners, the pandemic is still lurking and at a high in many countries. Due to its brutality, it has not just affected the health and personal wellbeing of people, but it has left a very strong negative impact on businesses across the globe, especially Small and Medium Enterprises (SMEs) as well as Micro-Entrepreneurs. Malaysia was no exception.
This impact has affected many sectors across the economy. The Merger & Acquisition (M&A) market is no exception. It was reported that M&A activities in Malaysia fell for the third consecutive year in 2020, hurt by the impact of the Covid-19 outbreak. However, experts see a bounce-back for M&As towards Q4 this year as a solution for the troubled businesses that have been significantly wounded by the Covid pressure.
According to the Entrepreneurship Development and Cooperatives Ministry in a Parliamentary written reply dated Nov 5, 2020, a total of 32,469 SMEs had folded since March 2020 when the movement control order (MCO) was first implemented to curb Covid-19. The Ministry, quoting statistics by the Companies Commission of Malaysia (SSM), said that 9,675 SMEs shut down operations during the first phase of the MCO from March 18 to June 9. Then a further 22,794 SMEs shut down during the recovery MCO that took place from June till September last year, with the highest figure recorded in August with a total of 17,800 SMEs.
Others either suffered from having to offer pay-cuts to their employees or laying off staff, just to make ends meet.
However, this pandemic has taught many a lesson in business survival and lured them towards the necessity of M&As – as the old saying goes, “receiving a piece of the pie is better than receiving nothing at all.”
Mergers and Acquisitions, despite the alarming sound of their title, brings many benefits to business owners. There are four common types of M&As in Malaysia: the acquisition of assets or business, acquisition of shares, joint ventures and total takeovers.
“There are certainly advantages from a business standpoint in terms of entering into an M&A transaction and there are also different types of M&As that Malaysian entities typically partake in. The acquisition of shares is the most common wherein either a certain percentage of shares in a company is sold by a seller to a buyer or 100 per cent of all shares in a company is sold by its shareholders to a Purchaser, in which case this is known as a complete buyout. Joint ventures also serve a great purpose for business growth and this can come in the form of merging two companies together or creating an entirely new separate entity for new business ventures between parties, in which case is known as an incorporated joint venture with the new separate entity sometimes known as a special purpose vehicle (SPV).” – Cassandra Nicole Thomazios, Partner from MahWengKwai & Associates.
M&As are not just practical for SMEs, even larger firms have decided to take this proactive solution to benefit their organisations. The largest M&A deal last year, valued at US$2.72 billion, was in the agricultural sector. This was the planned takeover by the Federal Land Development Authority (Felda) of FGV Holdings Bhd shares as announced in December last year.
An example of M&As in the SME sphere is that of CTOS Digital Sdn Bhd, a company involved in credit reporting which recently acquired 100 per cent of shares in Basis Corporation Sdn Bhd in 2020 to expand their portfolio and for business growth as Malaysia’s leading credit reporting agency.
“Despite the ongoing pandemic, lately we’ve seen a slight increase in bigger companies acquiring smaller companies especially within the same industry sector and this is predominant in joint ventures and acquisition of shares as part of M&A transactions. It is not uncommon for business owners to sell equity in their company, either in part or in whole, in return for investments during this difficult time. It is also a time when bigger companies may take advantage of the opportunity to acquire smaller companies for a lower purchase price.” – Raymond Mah, Managing Partner of MahWengKwai & Associates.
In an increasingly competitive and financially constrained environment like we are in now, corporate leadership must identify and pursue growth opportunities that will strengthen their organizations’ market position and financial performance. Growth strategies that include developing new service lines or markets, expanding existing service offerings and markets served, entering into joint ventures to develop or expand services/markets, are outweighed by the advantages of merging with or acquiring existing operations from competitors, or other providers.
Acquisitions can quickly and dramatically shift an organization’s position by improving accessibility to clients in new attractive markets as well as enhancing access in existing markets, fundamentally changing the market position by moving the organization from a subordinate position to a more dominant position, creating barriers that preclude the competitive entry into a market, facilitating reorganized service distribution and operations to significantly reduce the cost of delivering services as well as providing operational capacity for services at a lower cost in a better timeframe than would be required to create such capacity without an acquisition or merger.
Many organisations have also reported that an M&A move has enhanced their organization’s financial performance and credit rating, thereby improving access to capital and lowering the cost of capital.
To comprehend these strategic and financial benefits, businesses will need to assess their current ability to pursue M&As, and commit the time and resources needed to develop such capabilities, if currently limited or absent. Hence, connecting with legal experts who specialize in Merger & Acquisition deals would be a smart move for businesses, regardless of small or big, to secure a brighter and more sustainable future post-Covid-19.
If you seek legal advice on your business or have any inquiries on mergers and acquisitions, please visit www.mahwengkwai.com
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