State of mergers & acquisitions in the “New Selective Consumption Economy” due to the pandemic
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The COVID-19 pandemic has disrupted the entire world and effected everyone in some shape or form. Countries, Governments, Corporations, SME’s (small & medium enterprises), Individuals, families and all segments of our society have been impacted. This is proof of how everyone and everything in this world is inter-connected – from human health to trade, travel and global business. The mergers and acquisitions aspect for businesses has had no immunity and has also evolved to align to the new economic principles.
- Based on the nature of the activities and relevance of services offered by businesses during the global pandemic, whilst some businesses like the hospitality, tourism, aviation and retail have had a deep impact and have been more affected than others, whilst other businesses like healthcare, pharmaceuticals, disruptive technologies, food retail through e commerce, digital businesses etc. have flourished leveraging their business model, ease of distribution and rise in consumer demand spiraled by the pandemic.
- The IMF predicts that the global economy will contract by 4.9% this year, down from growth of 2.9% in 2019, while the World Bank has forecast a fall of 5.2%, the worst contraction since the Second World War.
- As we prepare to enter 2021, we are also witnessing the emergence of a “New Selective Consumption Economy” wherein several macro as well as micro economic aspects have been altered.
- A macroeconomic factor being a pattern, characteristic, or condition that emanates from, or relates to, a larger aspect of an economy. Covid-19 and the impact this pandemic has had on the world has altered global macroeconomic factors across the globe with no immunity seen anywhere. We have witnessed significant economic, environmental and geopolitical events during the last 12 months which have widely influenced national, regional and the global economy by impacting economic outputs, unemployment rates, inflation rates etc. We have also seen changing monetary and other regulations which has some potentially dynamic global consequences.
- Inflation is rising, global gross domestic product (GDP) has declined dramatically, global national income has been sliding down, unemployment levels have been all time high, Government spending is rising, stimulus packages provided using public money have ballooned to break even points are just some examples of dynamically changing macroeconomic factors which have played their role to create the “New Selective Consumption Economy”. Such economic performance metrics are closely tracked by Governments, Corporations, Companies, and consumers alike and have a direct correlation between the state of the economy and the future state of the business.
- “New Selective Consumption Economy” has been created due to the following macro-economic factors: Inflation, which is a progressive increase in the average cost of goods and services in the economy over time, when increased causes the cost of living to go up. The economic growth rate which is the percent change in the cost of the output of goods and services in a country across a specific period of time, relative to a previous period, which when reduced slows down the global economy. A price level which is the variation of existing prices for economically produced goods and services, when rises provides challenges to the entire economy. The Gross Domestic Product (GDP) which is a quantitative measure of the market value of all finished goods and services produced over a given time period, when reduced has a huge impact on the global economy. National Income which is the aggregate amount of money generated within a nation, when becomes altered or lower, has a major impact on consumer and Government spending. Unemployment level is the rate of unemployment which is the unemployed share of the labor force in a given country, calculated and stated as a percentage, which when increased poses a severe challenge to get the workforce back into circulation.
- On the other hand, Microeconomic factors have also contributed to the development of the “New Selective Consumption Economy”. Micro economic factors study the decisions of individuals and firms to allocate resources of production, exchange, and consumption. It deals with prices and production in single markets and the interaction between different markets but leaves the study of economy-wide aggregates to macroeconomics. Various types of models based on logic and observed human behavior are evolved by economists to handle the challenges brought about by the global pandemic.
- It is crucial to understand the core microeconomic factors affecting your business which will enable in planning and preparation, as well as long-term business strategy development. The six microeconomic business factors that affect almost any business are customers, employees, competitors, media, shareholders and suppliers.
- “New Selective Consumption Economy” has also reshaped and influenced micro-economic factors which need to be considered by organizations to assess the impact and future readiness. How these factors have been impacted by the pandemic and how organizations need to respond to these in the future is crucial:
- The Impact of Customers, which have the most direct microeconomic impact on a business. The simple fact is that you can't successfully operate a for-profit company without attracting targeted customers. Knowing your ideal customer types and developing and presenting effective marketing campaigns are integral to building a customer base and generating revenue streams. The pandemic has created a massive impact on customers by changing their level if disposable incomes, propensity to save, increased used of e-commerce, ushering in higher levels of unemployment etc. New customer segments with changed income and geo-demographic levels will emerge in the future, which organizations need to be ready to understand and tap. New working from home needs will need to be catered to and new products and services need to be designed to keep meeting dynamically changing needs.
- Availability of Employees, is a crucial factor as employees are the most valuable asset for any corporation as it is your workers who produce, sell or service the goods and service that drive your business. The availability of qualified, motivated employees for your business type is vital to economic success. If you operate a highly technical business, for instance, you might have to pay more in salary to attract a limited number of available, specialized workers. The pandemic has seen the most severe impact on employees after World war II with Millions of employees out of work, thousands currently living on social grants for meeting their daily needs, hundreds of thousands of employees having lost their homes as they cannot afford to pay rents or mortgages, staff furloughs, staff layovers, leave without pays, extended holidays and early retirement for employees. The list seems endless and the pain unimaginable. Once the business restart, it would be difficult to go back to the pre Covid levels and it would take several years for employees to get a kick-start back into their dream jobs and enable earning levels like before.
- Distribution Channels and Suppliers are a key aspect for any business. Sourcing goods used in production or resale and distributing your inventory to customers are important as well. Manufacturers rely on materials suppliers and resale companies rely on manufacturers or wholesalers to transport goods. To operate profitably, you need to get good value on products and supplies and, in turn, offer good value to your customers with accessible solutions. The pandemic has shifted a huge focus on digital businesses and new distribution models with dis-intermediation and a direct to consumer approach, which is here to stay. Several companies have gone bust of files for bankruptcy who could not manage their distribution or suppliers during the pandemic and this is testament to the importance of these two elements for future businesses to survive.
- Level of Competition impacts every business and the economic livelihood. In theory, more competitors means your share of dollars customers spend diminishes. However, a large number of competitors in an industry usually signifies lots of demand for the products or services provided. If an industry lacks competition, you might not find enough demand to succeed in the long run. The level of competition has increased during the pandemic as every business is focusing more on the share of the customer’s digital wallet, businesses from other industries have pivoted their businesses to align to the current and more immediate needs. We have seen several examples from Air BnB which pivoted from selling rooms and homes for travel to selling on line experiences to General Electric which moved from producing air craft engines in tier assembly lines to producing ventilator machines and medical equipment’s in the same factory.
- Media and the General Public plays a vital role. Your local community and media affect your ongoing business image. Communities often support companies that provide jobs, pay taxes and operate with social and environmental responsibility. If you don't do these things, you may run into negative public backlash. Local media often help your story proliferate, for better or worse. We have seen this factor to be emerging as a major change post the pandemic with the rise of fake news, manipulated media and politics, who and what to believe will be questionable. The very role of WHO (World Health Organisation) is in review by some based on how their media and public opinion was handled during the pandemic.
- Availability of Investors is the most significant aspect which impacts access to growth capital and equity. Shareholders and investors may help fund your company at start-up or as you look to grow. Without funds to build and expand, you likely can't operate a business. You could look to creditors, but you have to repay loans with interest. By taking on investors, you share the risks of operating and often gain support and expertise. You do give up some control, though. The role of investors has also evolved during the pandemic, which has given rise to reshaping the mergers and acquitsions businesses the world over.
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Looking at the two side eco-system for mergers and acquitsions there are changes, consequences and several impacts on both the potential buyers as well as the sellers in the marketplace.
- On the Buyer’s side, the pandemic gave rise to the “New Selective Consumption Economy” which is offering a blessing in disguise as it create for the buyers with ready cash the best time to buy based on the typical high traction periods when the markets are down, when assets are stressed or sellers are in a distress, as this is the time when investors can leverage exceptional buys and exit when the business cycles have matured so as to extract the best shareholder value and gains.
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With national economies suffering from revenue shortages, and populations in need of additional government support to mitigate the impacts of the crisis, SWFs (Sovereign Wealth Funds) have in many cases seen their roles transformed. As a result of reduced income, many governments have been tapping SWFs to help balance budgets and provide stimulus to businesses or households. This development has changed the conventional wisdom surrounding SWFs, which have combined assets estimated of around $6trn globally.
- Before the pandemic the funds were seen as having limited – or a total lack of – liabilities. However, Covid-19 has seen SWFs called on to meet the implicit liabilities associated with economic shocks. Among some SWFs, there is a growing realization that they are no longer standalone institutions, but rather fiscal policy tools that are fully integrated into the macroeconomic management of their respective countries.
- This shift has also brought about significant challenges for SWFs as they adapt to the new economic environment. For commodity-based funds, many of which are underpinned by significant hydrocarbons exposure, the reduction in economic activity associated with Covid-19 has combined with persistently low oil prices to create twin challenges. Meanwhile, for funds primarily based on trade surpluses, the deceleration in global trade and subsequent logistical and transport challenges have created similar hurdles.
- Covid-19 has forced many of the less liquid SWFs to offload assets to generate cash. The trend is expected to be particularly prevalent in countries with a heavy reliance on oil revenue. In light of this, JP Morgan estimates that SWFs in the MENA region could dump up to $225bn in equities this year.
- In addition to selling off assets to pay for budgetary spending, some SWFs have been called on to make other forms of investment. In June Temasek, Singapore’s SWF, recapitalized domestic shipbuilding and repair conglomerate Sembcorp Marine with $1.5bn. This came after the fund channeled $13bn into flag carrier Singapore Airlines.
- While some funds have sought to offload assets, others are looking to take advantage of lower share prices during the pandemic. Among them is Saudi Arabia’s Public Investment Fund (PIF), which – despite the downturn in the global hydrocarbons industry and its stated goal of spurring diversification – has recently made investments in international energy giants. In April the PIF acquired around $1bn worth of stakes in European energy majors Royal Dutch Shell, Eni and Total, which was followed by a $200m investment in Norway’s Equinor. The fund also acquired stakes in other sectors affected by the pandemic, including an 8.2% stake, valued at $369m, in US cruise ship operator Carnival, and a $300m investment in events company Live Nation.
- The PIF is not the only active investor among SWFs in this difficult environment. According to data from capital markets data company PitchBook, SWFs poured $17bn into venture capital companies in the first half of the year, exceeding the 2019 full-year levels. Chinese tech companies Tencent and Kuaishou were both significant beneficiaries, while Abu Dhabi’s Mubadala Investment Company put $3bn into Waymo, Alphabet’s self-driving technology arm.
- Among some funds, there has been a broader shift towards tackling issues related to the pandemic as they reshuffled our priorities based on Covid-19 by focusing on investments that were emerging in their respective markets across food security, medical security and medical supplies etc.
- On the seller’s side, the global pandemic has impacted several business across the board. Revenues have become eroded and unpredictable, costs have ballooned, bottom lines have been eroded, balance sheets have become feeble and cash flows have become a crisis. Despite the Government announced aid and relieve packages, the banking and financial services sector has not really helped ailing businesses and little assistances has been extended only by loan interest deferments etc. Over draft facilities and loan extensions to businesses in need have not been extended. Banks are not offering debt as they want to mitigate their risks due to business risks and rise of Banks Non-Performing Assets (NPA’s)
- This has given birth to some game changing mergers an acquitsions opportunities for selected industries and businesses. A striking example of the sellers deal making in the “New Selective Consumption Economy” is Reliance Industries, India Jio Platforms which raised US $ 15.2 Billion investment. This huge capital infusion at the height of a global pandemic accounted for more than half of the investment into telecom companies globally this year. What is interesting to learn is the rational for seller was to help repay Reliance Industries’ net debt of $21 billion well ahead of schedule. The oil-to-retail giant is now “net debt free”.
- As per The Financial Times, the Big technology companies are hunting for deals at their fastest pace in years, racking up acquisitions and strategic investments despite increased regulatory scrutiny during the coronavirus-led market turmoil. Alphabet, Amazon, Apple, Facebook and Microsoft have announced 19 deals this year, according to Refinitiv data from May 26, representing the fastest pace of acquisitions to this date since 2015. The Financial Times on Tuesday reported Amazon was also in advanced talks to purchase the self-driving car company Zoox, which was valued at $3.2bn two years ago. Meanwhile, Facebook in March announced its largest international investment yet, purchasing a $5.7bn stake in the juggernaut Indian telecoms operator Reliance Jio. The deals mark a departure from the 2001 recession and the 2008 financial crisis, when tech companies largely retreated from big purchases following dips in the stock market. One big difference between now and the last financial crisis is the cash balances of the tech majors are in the hundreds of billions, all effectively onshore, due to the US tax changes due to President Donald Trump’s move to lower the rate on repatriated offshore profits.
- The deal making streak also represents a further consolidation of Big Tech’s power in the middle of the Covid-19 crisis, as the groups look to capitalize on their record valuations and resurface as the dominant players in emerging sectors. Antitrust advocates have warned that such opportunistic deals — some of which involve bargain purchases of start-ups whose business models were affected by the crisis — risk widening the gap between the largest players and their smaller competitors.
- With $6trn under management, SWFs still remain major players in global finance and have the potential to mitigate some of the worst financial consequences of the current crisis. As countries recover from the economic recession, recent developments suggest the funds will be seen as a key tools in building resilience against future economic shocks.
- There has never been a more exciting time like now to enable a merger and acquisition transaction. At Bchain we believing in making things happen for good. For more information on how we can help you buy or sell your business, do reach out to sunil@bchainme.com
