(MENAFN- The Peninsula) The Peninsula
The prolonged lockdown has created an unprecedented situation for many Small and Medium Enterprises (SME) as a lot of them may not have adequate working capital or cash flow to restart their operations after months of shutdown. This can be a win-win situation for investors who are looking for inorganic growth and diversifying their investment portfolio, noted an industry expert, yesterday.
Sundaresan Rajeswar (pictured), who specialises in asset valuation services has said that right strategy should be there to pursue small deals that accrue to a meaningful amount of market capitalisation over multiple years instead of relying on big-bang transactions due to today's fast-moving, increasingly uncertain business environment.
'An economic downturn due to COVID-19 makes SMEs very vulnerable with generally small reserves and limited working capital. Many SMEs rely upon a steady flow of continuous demand for their products and services else it will struggle to survive a prolonged period of reduced economic activity, said Rajeswar, who is working for a subsidiary of Teyseer Group.
He added: 'One way to strengthen entrepreneurial resilience in fragile settings will be to support through an extended period of an economic downturn by increasing the liquidity. Companies looking for business expansion opportunities can get into win-win situations through mergers and acquisitions (M & A) of smaller business entities. M & A success track record indicates industry-specific scalability, getting skills and technologies faster or at a lower cost, consolidate to improve competitive behaviour and transformational merger as prime drivers.
He also said that a diligent M & A decision is always considered a significant milestone in a successful business story. The need post-COVID-19 crisis will be to build resiliency, and a pragmatic M & A can help companies resort to proactive deal sourcing and opportunistic deal evaluation.
'The strategy should be to pursue small deals that accrue to a meaningful amount of market capitalisation over multiple years instead of relying on big-bang transactions due to today's fast-moving, increasingly uncertain business environment. Treat M & A as an enduring capability rather than a project or a rare event. M & A strategy and corporate strategy should be connected, and hence starting point should be a thorough self-assessment with a market assessment of the company.
M & A initiatives should start with an evaluation process by identifying growth opportunities in business lines, markets served, or a combination thereof. Ascertain whether the strategic value-added business case for a combined entity is compelling enough to proceed. Thus methodically identify 'likely suspects as well as 'outside the box possibilities based on management experience, in-house research, use of consultants, and other methods.
The valuation of an entity being acquired involves assessing the target company, and there are three key valuation methods; discounted cash flow analysis, comparable transaction analysis, and comparable publicly-traded company analysis. The next is due diligence that involves a critical review of financial, legal, and operational position to ensure the accuracy of the information and full disclosure. Post completion of due diligence, the parties to negotiate definitive agreements and execute it.
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