Why companies need M&A?

The financial world set a record in 2021 for mergers and acquisitions. The value of such deals has reached $3.9tn to date, according to data compiled by Refinitiv, eclipsing the previous record, set in 2007, more than double the amount from the same period last year, and up from $2.6tn in 2019. So what’s really underlying this sustained momentum? As strategic as M&A deals can be, there are also economic reasons at their core. Every transaction needs to bear positive results to the parties involved. Tunisian business owners need to understand this tool at their disposal. Therefore, Emergence Partners is sharing with you the reasons for which a company may need to capitalize on the current wave and engage in mergers and acquisitions.

Growing the Company

Growth is one of the key indicators analysts look at when evaluating performance. A growth mindset is important for a company as we are in a period of uncertain global growth and M&A is part of the toolkit to position a business for growth. The company can expand into new markets and new geographical regions by acquiring new technologies or intellectual property that offers a competitive edge. Growth is also associated with synergies, a word commonly used to refer to the value created after two companies join, that wouldn’t have been possible otherwise, and that encompasses increased productivity and sales, economies of scale, and strong brand loyalty. Mergers and acquisitions are a faster way for a company to penetrate new markets, notably the European and/or African markets that will give Tunisian companies a chance to scale operations significantly, instead of relying on traditional sales or marketing strategies (especially in the case of cross-border deals).

Supply Chain, Pricing, and Margin Control

Supply chain is now strategic, particularly in these times of stress where companies need to have a diversified supply chain. It may cost more to have a broader supply chain, but businesses can’t be faced with whatever geopolitical or pandemic reasons that may shutoff their supply chains.

This is a vertical that Tunisian businesses can position themselves on as closer, more culturally similar, and faster to integrate alternatives to Asian or eastern European players.

Vertical mergers can be an optimal solution as they reduce the number of players in these supply chains by removing the layers of costs eating away at the company’s margins. The resulting effect edges out competition and is twofold. On one hand, lower costs mean lower prices which translates into higher sales and a bigger market share. On the other hand, acquiring a supplier shores up the supply chain, reduces the effects of systemic risks such as the global Covid-19 crisis and strengthens the company’s pricing power. Low pricing power is an often cited as an obstacle for the growth of Small and Medium Enterprises, which make up more than 92% of the Tunisian economy. As we are heading to a post-pandemic world, dynamic companies are already making the necessary moves to shorten their supply chains.

Diversifying Business Interests and Eliminating Competition

Big players find a necessity in M&A in order to diversify their product and service lines, engaging in cross-selling for example. They also find it wise to keep an eye out for innovators who might become competitors. That is why, in this case, mergers and acquisitions are a key to diversification. Aware of this fact, many SMEs rely on innovation and R&D to stand out and increase their chances of being acquired especially if they have a monopoly on the required resources (licenses, rights, patents, brands, raw materials or even a strategic location).

Achieve financial and operational strength

During the global financial crisis of 2008, banks faced the risk of running out of business and were compelled to deleverage their failing balance sheets. Similar events such as covid-19 or political instability, can jeopardize the future of a company that may resort to distressed M&A. This is something we may see more of in Tunisia following repeated lockdowns and activity slowdown, as many businesses struggle to keep their heads above water.

Companies should position themselves on the offensive side. If anything has been proven coming out of the financial crisis and the pandemic is that scale matters, having the balance sheet and financial stability matters, having geographical diversification and products diversification matters. Which is why companies should rely on M&A to build the required financial and operational strength needed. Tunisian executives in particular should display the optimism we see in the global markets and go forward with transactions that benefit from the current economic environment.

Ultimately, the reasons for companies to merge or acquire other companies vary from one deal to another. There is a very powerful mix of growth focus, supply chain focus, technology focus, even ESG focus that form a strong tailwind towards using M&A as a way of improving business. It then is crucial for managers to seek sound advice and understand the full implications, risks and benefits of M&A before making strategic long-term decisions.

Originally published at https://emergence-partners.com.