LIFE after Covid-19 for the corporate sector will witness an enormous amount of change from what we know now.

While big corporations may wonder if letting much of the staff work from home may really be a good idea to save exponentially high costs of office building rents, utilities, transportation, staff meals etc, smaller companies that have suffered greatly during the lockdowns as their fixed and variable costs continued to remain high despite declines in revenues may give in to mergers and acquisition (M&As) to remain afloat in a sea of financial crisis.

Ten businesses that have been more significantly impacted by the pandemic and worldwide lockdowns include restaurants, hotels, TV and film, sports, fitness industry, crude oil industry, construction, sex workers and travel industry. Aviation has been the worst hit industry. According to Forbes, nine airlines have applied for bankruptcy so far: Flybe, Trans States, Ravn Airlines, Compass Airlines, Virgin Australia, Air Mauritius, South African, Aviana Airlines and Thai Airways.

‘Companies have the option to either scale down their production or seek a similar business entity to join forces and remain viable’

While most of these are scarcely relevant to Pakistan, there are many sectors that have been equally affected by the pandemic and lockdowns. Such sectors include banks, insurance, textile, automobile assemblers, cement, engineering, fertiliser, food and fast-moving consumer goods (FMCGs), pharmaceutical, power generation and sugar industries.

Where the small and medium enterprises (SMEs) have partially shut down operations for good and fired workers, larger companies struggle to finance their operating costs, beat competition and remain viable. In such circumstances, can M&As be the way out?

“There is always the possibility of M&As in times of disaster,” affirms Khalid Mirza, former chairman of the Securities and Exchange Commission of Pakistan (SECP), Competition Commission of Pakistan and the SECP Policy Board of which he still is a director.

“One of the main reasons for mergers is to search for efficiency and economies of scale,” he said. He said when two viable enterprises join hands and restructure, both can continue to run a successful business. Mr Mirza said cash is the king in the M&A world. Corporate entities with loads of cash on their balance sheets can bide their time to find the right acquisition targets at the right price. He said the M&A activity could take place in any sector.

Khurram Schehzad, CEO of Alpha Beta Core, concurred that in the midst of an economic and financial crisis, the M&A activity might pick up pace. Mergers may be the choice to beat competition while it could be the right time for acquisitions when assets are available at cheap valuations. There could be a lot of value hunting. He said many companies decided to diversify like the ride-sharing services ventured into food delivery and others in online shopping. “Companies change their model in line with the new normal.”

Interestingly, while industries continue to pile staggering losses, technology and technology-related companies have been the beneficiary of the pandemic. He said that five technology and technology-related stocks command 20 per cent market capitalisation in the S&P 500 Index. They include Facebook, Apple, Microsoft, Google and Amazon. Most of them have thrived during the Covid-19 crisis owing to huge growth in demand for videoconferencing, entertainment, socialising and work-from-home needs. Incidentally, three major technology stocks listed on the Pakistan Stock Exchange (PSX) — TRG Pakistan Ltd, Avanceon Ltd and Netsol Technologies — hit their upper circuits on the first day of trading after the six days of Eid holidays. The benchmark KSE-100 index, meanwhile, fell 141 points.

Tariq Iqbal Khan, former chairman of National Investment Trust, said when there is demand compression owing to a crisis like Covid-19, companies may decide in favour of a merger in place of competition and the M&A activity can take place in both financial and industrial sectors.

He said that at the moment the purchasing power of the consumer is compromised and many people prefer saving to spending. It stunts total demand and companies have the option to either scale down their production and sell at lower margins or seek a similar business entity to join forces and remain viable. Mr Khan said that while big corporations with tills full of cash may do acquisitions, they have to follow the provisions of the Takeover Law 2002 and seek the permission of the Competition Commission of Pakistan with full disclosures. The M&A activity should not result in monopoly.

The companies that intend to go into M&A or joint ventures (JVs) in the country have to apply for clearance from the Competition Commission of Pakistan under Section 11 of the Competition Act of 2010.

Bushra Naz Malik, member of the commission for M&A and information technology, says that in the past two weeks, the CCP gave clearance to nine mergers. M&As and JV transactions approved by the regulator since Jan 1 include two mergers, one JV and 18 acquisitions in various sectors of the economy. Since its inception in 2007, the CCP has given clearance to 780 M&As and JVs. “To ensure that the commission continues to perform its statutory functions amid Covid-19, the regulator has explored various online avenues.”

In mid-May, the commission had launched an online system for the processing of merger applications, complaint filings and conducting hearings “to facilitate the local and foreign investors intending to invest in Pakistan through M&A and JVs”. Ms Malik said that the body had already started receiving pre-merger applications online and a couple of them were already on the table.

Published in Dawn, The Business and Finance Weekly, June 1st, 2020