PETALING JAYA, 11 October 2021 – A study of Malaysia’s Merger and Acquisition (M&A) activities at the onset of this pandemic reveal an increasing trend for small and bolt-on acquisitions as the most popular approach among Malaysian businesses. This trend is driven by large companies aiming to strengthen their market position, as well as private equity players' appetite for bolt-on acquisitions that are complementary to their platform investee companies.

The study, which was conducted by KPMG Corporate Advisory and Zaid Ibrahim & Co. (a member of ZICO Law), also found that companies hard hit during the pandemic looked towards M&A to diversify beyond their core revenues in an attempt to enter industries with better economic prospects and to generate more consistent cash flows.

Based on the published report entitled ‘Beyond the crisis: M&A outlook in Malaysia’, 63% of business leaders are now focusing on smaller acquisitions, which opens up potential for smaller businesses that wish to take advantage of this trend by leveraging the buyer's strengths to take their company to the next level.

A majority of business leaders surveyed (60%) also believe that deal-making will be an important part of their growth strategies in 2022, while 47% have begun exploring M&A opportunities this year.

Emily Choo, Head of Corporate Finance at KPMG in Malaysia, anticipates additional scrutiny is to be expected in the due diligence process especially in the current climate of economic uncertainty.

“Many business leaders identified the need for accurate forecasting as one of the challenges in the M&A process. Buyers and sellers may hold opposing views on the impact of COVID-19 on business operations. As a result, buyers find it challenging to forecast growth, and these differences in perception and opinions may lead to a valuation gap,” she explained.

Emily further commented that sellers should be well prepared before entering into a process to maximize their chances of a successful deal. Buyers will want more clarity on how COVID-19 impacts the business in areas such as quality of earnings, the security of material contracts, and termination rights. They may also seek extensive representations and warranties, particularly in areas concerning changes in the business' financial and trading positions, default of material contracts, defaults on financial commitments, and other potential litigations arising from the pandemic.

From the legal perspective, Gilbert Gan, Managing Partner at Zaid Ibrahim & Co. added, “The relevance of material adverse change (MAC) clauses in sale and purchase agreements is expected to increase in the new outlook. Faced with uncertainty, buyers engaged in negotiations may look to incorporate MAC clauses as a possible option to exit transactions in light of unforeseen drastic downturns in the performance of their targets. In this new paradigm, parties will have to negotiate and agree on the scope of MAC definitions and how they engage with COVID-19-related events.”

Furthermore, Gilbert highlighted the need for both buyers and sellers to be wary of potential merger control provisions that may soon be included in the Malaysian Competition Act. Based on the survey, only 36.8% of business leaders are aware that the Malaysia Competition Commission (MyCC) has initiated the process to amend the Act to give it the power to control M&A of companies. 

Under the Act, MyCC may impose a financial penalty of up to 10% of the enterprise’s worldwide turnover over the period during which the infringement occurred. This is on top of the right of any person who suffers loss or damage directly as a result of an infringement of the Competition Act to bring a private action against the infringing parties in the civil courts. MyCC may even initiate civil action against the infringers.

Emily concluded, “The ongoing economic recovery calls for business leaders to strategically explore new opportunities, define and implement sound growth strategies in the ‘next normal’.

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