Amid the ongoing pandemic challenges, corporate mergers and acquisitions have undergone a phenomenal change, which has opened the floodgates for purposeful deals – whether mainstream, cross-border or cross-sector.
Mergers & acquisitions (M&A) are intrinsic explorations of growth opportunities. In the post- Covid world, M&A prospects have undergone a transformation, and found a conducive environment in the form of positive government intervention, a visibly buyout stock market, and a relatively stable banking system.
The massive need for domestic consolidation, especially in the Covid-hit sectors, ample outbound investment opportunities for cash-rich Indian players, and India’s growing attractiveness as a de-risking hub in the light of China’s Covid-led isolation are evident factors that augur well for M&As.
However, a significant boost has come about in unforeseen fashion. It is pertinent to take a closer look at the trigger.
Notwithstanding the havoc it caused across the globe, the Covid pandemic forced us to become solution-centric in record time. A case in point is the unprecedented disruptive innovation in healthcare: an incredible shrinkage in the bench-to-bedside progression. What was typically a laboratory contemplation of several years was reduced to a matter of few months.
Though the rapid vaccine development was rooted in purposeful collaborations, M&As also had a key role to play. Beginning with the much-hyped AstraZeneca–Zeneca talks of a merger that never happened, the hunt for Covid vaccines saw many firms join hands to combat the virus, including Merck-Themis, Novavax-Praha-Serum Institute of India, besides the $500 million Pfizer Breakthrough Growth Initiative.
The overall M&A activity, like every other endeavour, suffered a dip in Covid times. According to the Bain & Company’s 2021 global M&A report, the deal value and volume for the full year dropped 15 per cent and 11 per cent, respectively. The US M&A value fall was the steepest at 25%, but the Asia Pacific region suffered the lowest regional decline at 4%.
While most part of the first quarter of 2020 was in a steady state, a marked increase in distressed deals followed as a direct consequence of the pandemic. The second half gained discernible momentum. Going by Bloomberg data, vaccine breakthroughs coupled with Joe Biden’s victory, which is being likened to a status quo on tax rates, caused a flurry of M&A activity.
Back home, marquee deals in diverse sectors were struck throughout 2020, right from March-April, when the world was just about coming to terms with the Covid-19 reality. India contributed 12 per cent of Asia Pacific deals in the first half. In the second half, RIL made headline news for having raised $20 million from Facebook, Google, KKR
and Silver Lake Partners. Its M&A and JV formation spree was equally impressive, all being strategic investments in AI-powered tech firms and omnichannel platforms.
The fear of the unknown has redefined the momentum and methods of corporate growth strategies – whether M&As, joint ventures, or collaborations. Consequently, phenomenal changes are at play.
The post-Covid operational strategy will now be spelt out upfront in pro-forma projections and priority spend definitions. Target validation will be a meticulous real-time evaluation of asset quality and people issues. The extent and quality of digital resilience will be scrupulously defined.
Force majeure and material adverse change clauses have turned more material than ever before. Ditto for warranties, indemnity insurance and policy coverages. M&A designs and deliberations will now intrinsically adopt environmental, social, and governance (ESG) principles. Post Covid-19, growth and profitability will organically fit into the broader ESG framework for mainstream economic reasons, not as CSR mandates.
Many government directives have had a resounding effect. The green signal to telemedicine and door-step drug sale have opened avenues for healthcare in a big way. The February 2020 amendment to the Companies Act, 2013 has resolved the sticky issue of dissenting minority shareholders. The Scheme for Promotion of manufacturing of Electronic Components and Semiconductors (SPECS) will motivate many players to reassess their growth models and business structures in the guiding light of opportunities.
Electronic filing of applications, so also video conferencing for pre-filing consultations for green channel combination filings, should make life easier for M&A players. The value props of Special Purpose Acquisition Companies (SPACs) – speed, alacrity, cost-effectiveness, better market protection, and better bets – make them ideal vehicles of M&As. Their popularity in the US is already extending to Asia, and India may follow suit in due course.
Given the stability of the banking system (compared with the dismal scenario during the 2008 crisis), both rescue capital and confidence capital will become available for credible inorganic expansions and organic exigencies, respectively. Many corporates would opt for promoter pledges, divestments, and supplementary asset disposals for improving liquidity, ensuring stronger balance sheets, and taking calculated risks.
More as a knee-jerk reaction, inorganic growth may be unduly led by bargain buys to begin with. Consolidation is overdue given the lopsided harm inflicted by Covid-19 on smaller players across badly hit sectors.
The end of the moratorium period could, hence, trigger the beginning of an M&A spree. Having said that, over time, only the strategic intent will drive M&A agendas to fruition, whether in the form of building new capacities, acquiring critical skills and technologies, effecting prudent consolidations, or making breakthroughs in new businesses, geographies, and customer groups. Cross-sector deals will become more common than ever, given the import of unconventional alliances to stay ahead of the curve (and competition) in an era of perpetual unpredictability.
Promising startups working on the cusp of technology and healthcare will be among the pet acquisition targets.
Given the wide-ranging sanitisation amid a largely conducive environment, prospective M&As will become more adept at adapting to seismic shifts – whether technological, sectoral, or market-related to reinvent systems, reengineer processes, redesign continuity plans, and reshuffle core teams. Consequently, global supply chains and networks will be rationalised, and disruptive innovation will soar on the wings of technology, including artificial intelligence, big data, augmented reality, quantum computing, edge computing, blockchain, and robotic process automation.