M&A activity seen softening in near term

PETALING JAYA: Merger and acquisition (M&A) activities are expected to soften in the near term as market uncertainty adds to a mismatch in valuations.

Deloitte Malaysia executive director Yap Kong Meng said although the deal-making market is starting to show some life after the movement control order (MCO), it is expected to remain soft as long as the country’s borders remain close.

He also reckoned that mismatched valuations could also deter M&A activities, especially for assets that are directly impacted by the coronavirus (Covid-19) pandemic.

“Sellers are looking at the historical performance of the assets and could be reluctant to meet buyers’ valuation as they are still assessing the impact from Covid-19 crisis, ” he told StarBiz.

Malaysian Mergers & Acquisitions Association (MMAA) expects that there are likely more distress sellers in the market after the loan moratorium ends in September.

“The Covid-19 has drastically changed the business environment and that to preserve the value of assets, companies should re-examine their business model and reinvent themselves, ” said MMAA president Datuk Christopher Chan.

As such, he said despite the distress situation, there are M&A opportunities in economic downturns that will result in “creative destruction” as well as “creative accumulation” that will bring long term benefits to the economy.

Chan said that although more sellers who could be going into the market, buyers, especially foreigners, are facing restrictions as the country closes its borders due to Covid-19.

“While we see hiccups in M&A activity as a result of Covid-19, we are seeing interest by foreign buyers in the market looking for deal opportunities.

“The Covid-19, which came on the back of the US-China trade war, has disrupted many companies’ supply chains due to geographical concentration. As such, these companies are now working to diversify their supply chain to remain agile with changing landscape, ” he said.

Yap, who is also an MMAA vice president, expects that there would be more public-listed companies to be privatisation targets due to attractive valuation amid weakness in the stock market.

“Some listed companies were already a privatisation target in the past by their shareholders, but the exercise didn’t go through due to pricing and valuations.

“We would see fresh offers to privatise these companies again and a new offer could be taking place as their shares were battered down from the recent market rout due to Covid-19, ” he said.

For example, the most recent one is the takeover offer for Yee Lee Corp Bhd at RM2.06 per share by its founder Datuk Lim Ah Heng @ Lim Kok Cheong. The deal was backed by Singapore-based private equity firm Dymon Asia. This was the second attempt of the parties to take the Yee Lee private, after the initial offer last year did not materialise as the joint offerors were unable to garner enough acceptance for the voluntary general offer at RM2.33 per share.

Wong & Partners, a member firm of Baker McKenzie International, managing partner Munir Abdul Aziz said the regulators should be more transparent in their policy and guidelines to spur the M&A activity in the country.

He said many guidelines in M&A activity are not publicly available especially on approvals and rejecting applications.

“Regulators need to publish decisions and rulings and provide reasons and justifications for rejecting applications and there should be a transparent and time-bound appeal process for any appeals against regulatory decisions, ” Munir said.

In addition, he said the regulator could improve the approval processes and make them more timely and transparent.

“Process of applying for new licences in a business transfer still takes too long, ” Munir said.

For public-listed companies, Datuk Christopher Chan said these companies may face hurdles in buying into businesses that are not similar to their core activity.

He said the Securities Commission should provide exemption and a broader interpretation of “similar core business” to spur the M&A appetite.

“For example, a supermarket company seeking to acquire a vegetable farming company might be subject to extensive compliance with guidelines because it might be viewed as dissimilar to its core business, although it is a natural upstream expansion to secure supply, ” Chan explained.

Source: The Star