This week's Budget announcement on higher tax allowances for mergers and acquisitions (M&As) is heartening. It raises the tax allowance for acquisition costs from the current 5 per cent to 25 per cent of the acquisition value.
Companies will be able to claim M&A benefits for acquisitions that result in at least 20 per cent shareholding in the target company, down from the current threshold of 50 per cent.
However, it is not clear whether the acquisition costs include the cost of post-merger integration (PMI), which is critical to the success of M&As.
M&As can help small and medium-sized enterprises (SMEs) in a number of ways:
- Potential synergies with another firm to exploit economies of scale;
- Increased market share through a horizontal merger;
- Control of manufacturing or selling processes through a vertical merger;
- Reverse merger, where private entities can become publicly traded companies without the expenses and time involved in an initial public offering;
- Globalisation through cross-border M&As as SMEs are often too small to globalise on their own.
Smaller firms can also combine through M&As to supply to multinational corporations and large local companies to fulfil orders on a sustainable basis.
M&As offer SMEs opportunities for significant inorganic growth.
When planned and executed properly, M&As increase the new entities' profits and return greater value to shareholders.
Yet, the sobering reality is that several studies have found only about 30 to 50 per cent of M&As are successful in increasing shareholders' values.
There are challenges in identifying and buying the right companies, paying the right amount and unlocking value from the newly combined entity through PMI.
PMI involves activities that are carried out after an M&A deal is closed.
During a merger exercise, companies often focus on pre-merger issues such as strategic, financial and legal fit, and neglect PMI issues such as cultural, technical and operational fit.
The latter is often the cause of a merger's failure.
What can be done to increase the odds of successful mergers?
The key lies in the effective execution of the PMI.
General Electric and Pfizer have successfully implemented many M&A cases because they focused on PMI.
Besides ensuring operational fit, close attention should be paid to melding the corporate cultures of the entities coming together.
This is especially so where local SMEs are involved in cross-border M&As.
Traditionally, after the M&A deal is closed, the acquiring firm will often deploy its own managers - who may not have merger experience - to take the lead in executing PMI activities in the newly merged entity.
They tend to restructure the acquired operation, rather than the acquiring company to which they belong. That may not suffice for ensuring a successful integration.
This approach also often runs the risk of intimidating staff of the acquired firm and may result in loss of key talent.
A new approach is to introduce independent integration consultants to facilitate the integration. Such trained specialists will be more objective.
The only downside, however, is that they are outsiders and will need to be orientated towards both merging companies.
There are not many such specialists in Singapore. They will recommend restructuring both the acquired and acquiring companies to maximise shareholder value.
The staff of the acquired firm will likely feel more comfortable dealing with these independent integration consultants.
To increase the success rate of PMI, these integration consultants should be involved from the beginning of the M&A process, which should not be viewed as separate and distinct from PMI.
To encourage more M&A activity among SMEs here, it is important that an M&A centre be set up with government support to serve as a service hub to coordinate the M&A ecosystem.
This centre can help to facilitate links between potential investors and SMEs, and experienced independent PMI consultants.
SMEs that need to find potential buyers can turn to the M&A centre for help, since many SMEs shy away from announcing that they are looking for a buyer.
As the economy continues to restructure, local SMEs must continue to anticipate and respond to changes in the business environment to remain competitive and grow.
Economic crises tend to trigger a surge in M&A activities.
Now, SMEs need to gear up and be prepared to participate in M&A activities that will help them scale up, in good times and in bad times.