‘Alpha companies will swallow weak firms after crisis’
The Competition Commission expects a flood of mergers and acquisitions
The Competition Commission is expecting a surge in mergers and acquisitions (M&A) once the lockdown is lifted, with those enjoying strong reserves swallowing the weaker ones.
The commission is an independent statutory body, mandated to investigate and evaluate markets, restrictive business practices, abuse of dominant positions and mergers and acquisitions.
Analysts suggest that the financial crisis caused by the Covid-19 pandemic will put large, mature and cash-flush companies in a prime position to buy out their competitors.
Covid-19 has led to a sudden stop in deal-making globally and pandemonium in financial markets. It has infected more than 2,08-million people worldwide and caused 138,487 deaths. Like his global counterparts, President Cyril Ramaphosa has ordered a nationwide lockdown in an effort to curb the virus, which resulted in more than 2,506 infections and 34 deaths in SA.
In March, Reuters reported that global M&A activity plunged 28% in the first quarter to its lowest level since 2016, aggravating a slow start to the year for dealmakers.
Commission spokesperson Sipho Ngwema told Business Day on Thursday that while there were some deals in recent months, there had been a marked decrease in M&A since the outbreak of the disease and the lockdown.
“We have seen a decrease in mergers during the lockdown but are anticipating an increase in activity as the economy is opened up. We will deal with matters as they arise,” Ngwema said.
In terms of avoiding or limiting job losses when companies merge, Ngwema said the commission would “deal with each case on its merits”.
University of Stellenbosch Business School visiting lecturer in corporate finance Brett Hamilton said it was clear that the Covid-19 pandemic would lead to business failures, with the Reserve Bank estimating an additional 1,600 business insolvencies in 2020. The “fattest”, with the strongest cash reserves, would probably survive.
Hamilton, a director at First River Capital, said cash flow was “the lifeblood of any organisation” but the lockdown had severely restricted businesses’ ability to generate cash through operations, and that accessing cash through debt or equity investment was limited in the current economic climate and possibly unwise.
The latest downgrade of SA’s credit rating to subinvestment grade by Moody’s severely restricted the country’s access to debt and it had seen a spike in the cost of debt, he said. The SA 10-year government bond yield had reached a maximum of 12.36% on March 24 compared with a low of 7.9% in 2018.
“So, debt may do more harm than good during these times, even with the debt relief pledges made by banks,” Hamilton said.
This left “alpha companies — large, mature and cash-flush — in a prime position to weather the storm, buy out their competitors and continue to invest for growth after the pandemic”, he said.
“Markets will become more concentrated and the position of incumbents more entrenched. The business world will look different after the pandemic, and it will most likely fall on governments to regulate the new ‘alphas’ to ensure better competition. If it should do so, and how it should be achieved, remains to be seen.”