As the pandemic continues to impact businesses across global economies, it has also fueled a reset in strategy for many organizations who now place focus on thriving instead of merely surviving. More than half of the respondents surveyed in the latest EY Global Capital Confidence Barometer, which gathered insights from more than 2,400 C-Suite executives globally, even expect a recovery in profitability that matches pre-pandemic levels by 2022. Most of these executives share satisfaction with their performance in response to the pandemic in comparison to their competitors, with more than half of the Southeast Asian respondents (which include Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam) believing that their organizations outperformed their competitors in engaging with local communities, operational stability, and digital performance.
However, this progress does not change the reality that disruption will continue at an accelerated pace not seen before the pandemic. Startups are rewriting the rules of the game, challenging business models in all industries as products and services enter markets much faster.
This makes it imperative for companies to continuously review how they can future-proof their strategy and business fundamentals. They must also critically review their portfolio to determine if it will remain relevant and profitable in the long term. A constant strategic and portfolio review process will allow companies to identify areas of growth at the earliest opportunity, as well as more quickly address areas of underperformance. To take advantage of opportunities to drive transformation for success beyond the crisis, executives will need to make bold moves and act with urgency.
DIVESTING UNDERPERFORMING ASSETS
The act of divesting distressed and underperforming assets is a conventional trend during a crisis — and it should also be expected to continue beyond the pandemic. It should be noted, however, that if it does not fit with an organization’s strategy, then even a strong-performing business might be tying down capital that can be better deployed in investments that deliver higher impact.
While business unit management bias is understandable, it can obscure the holistic view of the business that the review process should yield. Top-down assessments by the management and board can sometimes conflict with a bottom-up review process, especially when it comes to assessing synergies and the value of business units as stand-alone entities or potential divestitures. Companies will need to consider their divestiture by identifying assets at the risk of disruption as well as those that are facing future growth challenges.
MAKING TRANSFORMATIVE, STRATEGIC ACQUISITIONS
The survey revealed that over half of the Southeast Asian respondents at 56% seek to actively pursue mergers and acquisitions (M&A) in the next 12 months. This beats the average of 44% in the previous 11 years, and has been the highest number since 2012. Some of the drivers that increased this appetite for M&A include issues relating to regulations, the strengthening of technology, tariffs and trade flows, talent and new capabilities, and growth into adjacent business sectors or activities.
Most of the deals that survey respondents intend to pursue this year target the acquisition of specific capabilities as well as bolt-on deals, where smaller companies are acquired and added to an existing business. Many Southeast Asian corporate M&A deals tend to have bolt-on characteristics due to them being easier to execute. However, it remains to be seen if these smaller acquisitions will be sufficient for companies seeking growth in an environment that may look very different in the wake of the pandemic. Some companies also attempted roll ups, which consolidates multiple small companies so that the resulting larger entity can take advantage of economies of scale, but it should be noted that these transactions hold a much greater risk and a higher degree of difficulty to execute.
The success of the M&A approach depends on several factors. This includes ensuring that the acquisition is part of the business strategy, adequately considering and mitigating transaction risks, having a deep and well-structured analysis of the market and target, and securing correct financing of the acquisition. The extent of a detailed value-creation thesis with proper ownership and implementation actions will also make a difference between success and failure.
SUSTAINABILITY AS A CORE CONSIDERATION
Management and the board will also need to be strong stewards of the community as companies acquire and grow, making environmental, social and governance (ESG) considerations an important component of the corporate acquisition playbook.
Companies will need to update their ESG and acquisition frameworks to reflect various topics, with examples that include sustainable practices, environmental compliance, and operating with integrity from the perspective of all stakeholders.
TRANSFORMING AND TRANSACTING TO EMERGE STRONGER
It has been established that companies capable of transforming and transacting in previous crises have emerged stronger than their competitors. This means that embracing transformation accelerated by the right acquisitions will be key now and beyond the pandemic.
In this time of rapid disruption, boards must ask themselves whether their business strategy helps maintain market leadership and growth, and if their current portfolio strategy is sound or needs to be reshaped through divestments and investments. By taking advantage of the right M&A opportunities, organization will be able to drive long-term success beyond the COVID-19 crisis.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.
Smith C. Lim is a strategy and transactions partner of SGV & Co.