M&A Strategies in Singapore: Navigating Negotiations, Deal Structures, and Financing
Oakwood & Drehem Capital Pte. Ltd.
Founded in 2018, Oakwood & Drehem Capital is a compliance, corporate finance and valuation expert based in Singapore.
The M&A landscape in Singapore has experienced remarkable growth, while global and Asia Pacific (APAC) M&A activity declined in 2022. According to studies, many M&A deals fail to meet expectations, with acquiring companies often underperforming in terms of profit margins, returns, and earnings growth. Despite these challenges, M&A activity remains robust in Singapore, driven by strategic initiatives to enhance operational efficiency and shareholder value.?
As we enter 2023, economic uncertainties persist, including fears of a global recession and rising interest rates. However, these conditions paradoxically create opportunities for successful deals. Companies with well-crafted strategies and financial capacity can capitalize on reset valuations, reduced competition, and emerging assets, including distressed situations. Embracing M&A can position organizations to leapfrog competitors and pave the way for long-term success. Factors such as post-COVID-19 shifts and digitalization contribute to this vibrant M&A landscape. This article equips readers with insights to navigate and succeed in Singapore's M&A market.?
Key Trends:?
Despite the prevailing pessimism about global economic growth, the allure of M&A remains strong. According to PwC's 26th Annual Global CEO Survey, 60% of corporate leaders are not planning to postpone deals in 2023, despite the potential economic challenges and volatility.?
Seizing Post-COVID-19 Opportunities:??
Businesses have capitalized on emerging opportunities in recovering markets and new industries. For example, SATS Ltd.'s planned SGD1.8 billion acquisition of Worldwide Flight Services (WFS) aims to bolster its market share in the thriving air cargo industry. Online shopping habits and increased demand for e-commerce have spurred the need for specialized cargo handling, making SATS Ltd.'s acquisition of WFS strategically valuable. Similarly, UOB's SG$5 billion acquisition of Citigroup's consumer business in multiple countries positions it as a prominent regional bank, ready to capitalize on the reopening and resurgence of consumer banking activities in ASEAN.?
Addressing Operational Shifts:?
The COVID-19 pandemic exposed vulnerabilities in existing operating models, prompting organizations to seek M&A as a means to fill gaps and reinvigorate strategies. An example of this is the merger of Singapore Airlines' subsidiary, TATA SIA Airlines Limited, with Air India Limited. By leveraging M&A, this merger aims to enhance operations and competitiveness in response to the evolving landscape.?
Enhancing M&A Success:?
Companies should prioritize the following important factors in their M&A endeavors to raise their potential for success:?
Understanding the strategies used in negotiations can provide valuable insights into the dynamics of M&A transactions. To support M&A activity, the Singapore government has announced the enhancement of the Enterprise Financing Scheme for Mergers and Acquisitions. This enhancement, spanning four years, offers local companies greater access to financing options for acquiring local or overseas targets. The aim is to stimulate M&A activity among local SMEs and empower them with the means to pursue strategic growth through acquisitions.?
Exploring Effective M&A Transaction Approaches?
Global M&A activity in 2022 saw a decline of 17% in volumes and 37% in values compared to the record-breaking levels of 2021. Asia Pacific experienced a decline of 23% in volumes and 33% in values, with China being the most affected. EMEA performed better with a 12% decline in volumes and a 37% decline in values. The Americas saw a 17% decline in volumes and a 40% decline in values, with a significant drop in US megadeals. These trends indicate a shift in investor focus towards alternative markets due to various economic, regulatory, and geopolitical factors.?
M&A resets to pre-pandemic levels?
Deal volumes and values, 2018-2022?
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One of the best negotiation strategies is to constantly develop and build your relationships. Focus on creating and nurturing strategic, positive relationships. This can help to win many future negotiations.??
Negotiate the terms. There's more to negotiate than pricing, including escrow, survival period, and earnouts.?
“I see plenty of reasons to be positive about deal activity as we enter 2023. CEOs will have dealmaking firmly on their agendas as businesses continue to optimize their portfolios and consider how strategic M&A can help drive growth and their transformation journey.”
Malcolm Lloyd?
Global Deals Leader, Partner, PwC Spain?
Leveraging Opportunities for M&A Success?
The success of an M&A transaction hinges on the financing structure employed during the takeover. A well-planned and sustainable acquisition financing strategy is vital for achieving positive outcomes. Let's delve into the various financing options available to leverage opportunities for M&A success, with a focus on acquisition financing instruments.??
Debt Financing:?
One prominent financing option is debt, which can be structured using different tranches. The senior tranche, often referred to as the "first line," resembles a traditional bank loan. It holds a senior position among the company's loans and is fully secured. The senior tranche can be structured with regular repayments or as a bullet repayment at maturity. The interest rate is determined based on pre-agreed rates, including a base interest rate (such as Euribor or Libor) along with an interest margin (margin grid).??
Junior Tranche:?
In contrast to the senior tranche, the junior tranche represents a subordinated loan. It is frequently utilized as an additional source of debt financing or structured alongside the senior tranche. The junior tranche holds a subordinate position in terms of collateral enforcement and debt servicing but is serviced before the shareholder loan and equity. Additionally, it receives priority over mezzanine capital. Due to its subordinated nature, junior tranche carries higher risk, resulting in a correspondingly higher interest rate. Commonly, a base interest rate combined with an additional margin is applied.?
In conclusion, the M&A landscape in Singapore is thriving, driven by strategic initiatives to enhance operational efficiency and shareholder value. Despite global and regional challenges, Singaporean companies are capitalizing on post-COVID-19 opportunities, such as emerging markets and industries, to drive growth and market share through M&A.?
To succeed in Singapore's M&A market, companies should prioritize factors such as holistic value creation, long-term sustainable premiums, understanding different cultures and practices, extracting value from data, and utilizing ESG considerations. Thorough preparation, strategic execution, and effective post-merger integration are crucial for enhancing M&A deal success.?
The Singapore government is supporting local SMEs through the enhancement of the Enterprise Financing Scheme for Mergers and Acquisitions, providing greater access to financing options. This initiative aims to stimulate M&A activity and enable local businesses to pursue strategic growth through acquisitions.?
Building positive relationships and utilizing effective negotiation strategies are essential in M&A transactions. Companies should consider terms beyond pricing, such as escrow, survival periods, and earnouts, to ensure comprehensive agreements.?
In terms of financing, companies have various options, including debt financing with senior and junior tranches. Planning a sustainable acquisition financing strategy is vital for achieving positive outcomes.?
In summary, Singapore's M&A market offers significant opportunities for companies. By adopting well-crafted strategies, understanding negotiation dynamics, and leveraging appropriate financing options, companies can navigate the complexities of M&A transactions and position themselves for long-term success in this competitive market.?
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