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THURSDAY, October 06, 2022
Mergers and acquisitions post-Covid: redefining M&A strategies to create value

Mergers and acquisitions post-Covid: redefining M&A strategies to create value

THURSDAY, February 11, 2021

Many sectors will need to reinvent themselves in order to thrive, and M&A activities will have a strong influence in shaping the “next normal” environment and creating new business narratives for many companies.

Deloitte Southeast Asia was recently honoured to welcome Professor Aswath Damodaran, a professor of finance at the Stern School of Business, NYU, and the author of several textbooks on valuation, corporate finance and investment management, to be our distinguished guest speaker on the topic “Crisis as a crucible: a Jedi guide to investment serenity”. Professor Damodaran shared his views on ways to approach business valuations in this time of innovation and uncertainty. The webinar was valuable and could inspire business leaders and companies planning mergers and acquisitions (M&A) to rethink and design their strategies in the new world post-Covid-19.

Those who have been following Professor Damodaran’s valuation practices would be familiar with his statement about “the narrative as valuation”, which cites that “narrative without numbers is storytelling and numbers without stories to back them up are just financial modelling”. In the webinar, Professor Damodaran described a 5-step valuation, starting from developing the narrative for the business to be valued, testing the narrative to see if it is possible, plausible and probable, converting the narrative to value drivers, connecting the value drivers to valuation, and keeping the feedback loop to improve and modify the narrative.

There are implications for both business leaders and investors. For businesses to attract capital, they need to develop a rational narrative about their business, convey the narrative to investors effectively, and act consistently. Businesses also need to identify their value drivers and measure how the narrative is unfolding and changing in response to unforeseen events. Investors need to find companies that have convincing narratives, convert these narratives into value to justify the investment value. They must also be open to changes in narratives and numbers, especially during times of uncertainties and new phenomena.

The concept of narrative and numbers becomes clearer during current conditions as crises can affect a company's “story”, favourably or unfavourably, and consequently expectations of its business value. During the time of a typical crisis, resilient business leaders have to:

• Respond – deal with the present situation and manage continuity;

• Recover – learn and emerge stronger, and

• Thrive – prepare for and shape the “next normal”.

The post-Covid world will unleash structural and systematic changes and it is expected that recovery will be highly asymmetric across regions and sectors. Many sectors will need to reinvent themselves in order to thrive and M&A activities will have a strong influence in shaping the “next normal” environment and creating new business stories for many companies.

In a Deloitte publication on M&A amid Covid-19, it is anticipated that a combination of defensive and offensive M&A strategies will emerge as companies strive to safeguard core markets, accelerate transformation and position themselves to capture market leadership. Redefining M&A post-Covid in terms of rebound scenarios and strategic choices will bring clarity of purpose while confronting uncertainties. Inorganic growth strategies such as partnerships with peers, co-investments with private equity, investment in disruptive technologies, or cross-sector alliances could be alternative strategies beyond traditional M&A in a post-Covid world.

Companies in disadvantaged sectors such as aviation, hospitality and real estate may turn to M&A to safeguard their future. The defensive M&A strategies include:

• M&A to salvage value: companies that have been severely impacted and are in a financially vulnerable position will need to take decisive measures to secure their survival. Some will pursue M&A activities such as portfolio optimisation and divestment of non-core assets to increase capital efficiency, or wind down underperforming businesses or loss-making divisions to preserve the viable core business. Rapid turnaround strategies and speed of execution are crucial to maximise value.

• M&A to safeguard markets and maintain competitive parity: companies where the impact has been less severe, but remain in a financially vulnerable position, could use M&A to safeguard their markets and core businesses, and maintain parity with their competitors. Companies that have capital constraints should consider alliances and pursue co-investment opportunities to reduce risk and capital outlay.

Companies in sectors that are more resilient such as digital health, remote working technologies, enterprise security and media streaming may pursue acquisitions to capture their market leadership. The offensive M&A strategies include:

• M&A to transform the business and safeguard the future: companies that have strong balance sheets but expect a significant degree of structural disruption to their sector could use M&A to safeguard their customer bases and supply chains and accelerate transformation of their business models. They may pursue opportunistic acquisitions to prepare for “next normal” conditions or disruptive acquisitions to accelerate the adoption of digital technology in their businesses, and explore acquisition opportunities by actively scanning the market for underperforming peers and high-growth start-ups that are struggling under funding constraints.

• M&A to change the game: companies that are resilient could use M&A to capture market leadership. The next normal is likely to accelerate sector convergence from new customer behaviours and spending patterns. Companies should ally with both large specialist partners as well as start-ups from the innovation ecosystem to collaborate and shape new market offerings.

These M&A strategies will affect companies’ future business directions, their stories and expected business values. Business leaders need to be ready to redefine their strategies and develop new stories under the next-normal world with supporting fundamentals and commitments to achieve and create value for their investors.

As emphasised by Professor Damodaran, when a crisis hits, a company’s story matters more than ever before since numbers can no longer be used as a crutch.


Benchamaporn Piyakulvorawat
Financial Advisory Services, Deloitte Thailand