A process through which companies are bought, sold, combined or recombined is known as Mergers and Acquisitions (M&A). M&A is growing all over the world as a business strategy. The objective of modern business is value maximisation through the best utilisation of available resources. As such, companies have to continue creating value to sustain. Not all companies can have equal footing in terms of their business performances. Again, not all start-ups survive. Some of them manage to barely survive, some grow exponentially in size and shape, and some die their own quick deaths. M&A can come into play where buyers and sellers of different business entities can create substantial value through the consolidation of their resources in a non-zero sum game. In an acquisition, the buyer may enhance revenue growth, reduce costs of operation, and create synergies. In mergers, both the companies can restructure the value chain, gain economies of scale and eventually respond to competitive cost pressures, increase production by business process reengineering and gain tax benefits. For these reasons, the M&A activities are globally gaining momentum over the last few decades. The background for such value maximisation through M&A has been created in Bangladesh as well.
SMEs and M&A
The SMEs form the life blood of an economy. Successful SMEs eventually aspire to grow into large corporations and M&A can be instrumental in such growth. The SMEs have a flexible organisational hierarchy and a higher degree of freedom in decision-making when compared with large corporations. M&A help protect the unexpected winding-up of the SMEs by helping them grow in size, shape and market expansion. This is why SME owners need to have strategic knowledge on M&A for accelerating business growth.
Investment banks and M&A
At least 50% of M&A deals fail even in developed economies, in spite of costing time, money and energy. In order to reduce the failure rate, investment banks and/or the M&A advisors have to be mindful in making sure that every deal is driven by an appropriate business model. In doing that the investment banks have to engage the bankers, lawyers, accountants and other professionals.
The M&A process
The M&A process begins by giving due consideration to the key drivers, such as profitability of entering a new market through business expansion, revenue generation, cost reduction, etc. Thereafter, it is essential to consider both the seller and the buyer perspectives, and the regulatory requirements followed by the letter of intent. If everything seems right, proceed towards making the deal, going through stages such as structuring the deal, valuation, pricing and financing the M&A. Making the deal is not where it ends; managing the M&A deal is equally important. At this stage, communication and leadership come into play. The post-merger integration (PMI), with due emphasis on change management, is imperative for good results. In spite of the many ways of starting the deal, proceeding with the deal calls for a standard practice. However, negotiation skills at the start of the M&A process and change management skills at the PMI stage are the most important skills required to make any M&A initiative successful.
Corporate changes are determined by the provisions of relevant corporate laws. Hence, legal consideration is important in M&A to save litigation costs, reduce risk and aptly focus on the M&A deals. The legal consultant or the in-house legal team has a great role to play in creating a favorable legal environment for the M&A market. The regulatory requirements in M&A include general and industry specific regulatory issues. Exhaustive laws, by-laws and rules are essential to address the issues and maintain a favourable legal environment.
The possibility of M&A in Bangladesh
With the financial deregulation that started in 1982, the corporate sectors in Bangladesh have gained momentum. Bangladesh today has already become a middle-income country aspiring to be a high-income country in the future. Almost all the macroeconomic indicators are currently positive. Today, we have 63 banks, 31 NBFIs (non-banking financial institution), 58 investment banks, and 62 insurance companies that are doing well. There are also other industries like hospitality, medical and healthcare, energy, food, tea, airlines, etc. progressing at an equal pace. However, we have to understand, that in free market economy, only the fittest will survive. Again, every business goes through the decline stage in its life cycle.
Without appropriate measures from an early stage of the stagnant phase of the business cycle, the business may not survive. Recently, an NBFI called People’s Leasing and Financial Services Ltd. is facing liquidation, which is a cautionary signal for our financial sector. M&A can be one of the important strategic tools for the revitalising the financial sector, and expanding business in the context of Bangladesh. The stage is now set to welcome the M&A advisors to come forward and begin the process. Reportedly, there are several other NBFIs in vulnerable positions. The M&A can play an important role in overcoming this alarming situation. In terms of the legal environment, general regulatory environment is quite satisfactory in Bangladesh. For example, The Competition Law, Environmental Law, Labor Law, Securities Law, etc are in order. However, industry specific issues need to be addressed that the government has already taken initiatives for.
There are two main sources of financing in M&A deals: debt financing and equity financing. In debt financing, asset-based lending is a key driver for M&A, depending on the availability of collaterals. Again, the bank does not finance 100% of the collaterals; the buyer is to provide the balance of the purchase price and the working capital. An amalgamated company may also raise capital by offering and selling buyer’s securities. Alternative investment may be another source of financing the deals.
Training and development
In the Bangladesh context, the training on M&A is a must, since M&A is still in its infancy. The ambitious SME owners, CEOs, bankers, lawyers, accountants, and HR consultants are all heavily involved stakeholders of the M&A strategy and all of them need to engage in capacity building.
A smart CEO has to make a choice whether to build or buy. The CEOs have to do enough homework and understand the attributes of the M&A-driven business models. Although challenging, it is imperative to give due attention to capacity building of all the stakeholders of M&A. The other challenges include misunderstanding, power conflict, indifference, etc. In order to overcome these challenges, investment banks, large corporations and the government need to shift focus to M&A and related corporate advisory services. Besides, training sessions, workshops and seminars on M&A may be arranged frequently for all stakeholders.
The writer is the managing director and CEO at Prime Bank Investment Limited.