Mergers & Acquisitions (M&A) activities did not take place as rapidly as was expected by economists at the time Covid-19 reared its ugly head. Due to lockdowns that led to complete or partial closures of businesses and industries or curtailment of activities that could scarcely finance production costs, mass layoffs were triggered, businesses shrank in size and those that could not float in the sea of financial crisis had the Hobsons’ choice: sink or offer to merge with larger, stronger corporations.

The Covid-19 has not just pulled out one surprise from its bag — it had swiftly changing and multiplying variants. It has altered the entire concept of doing business. From the big corporations to small individuals— the daily wage workers have attuned to what people early in the days of pandemic mentioned as the “the new normal”.

Lockdowns, smart lockdowns, early closure of business hours have impacted individuals and companies alike. But out of the ten worst-hit industries, some are now on the path of partial recovery: constructions, restaurants, hotels, local tourism, sports, airlines and even cinemas have started to do business during relaxation in lockdowns where the fire of the pandemic still burns bringing disasters and destructions in its wake. Airlines are limping back to normalcy.

A fund manager with Rs120 billion under management said that central banks all over the world rushed to plug the hole that drained essential resources. The central banks cut down interest rates so that the liquidity-drained companies could keep running with advances for working capital.

About eight to 10 applications for an initial public offering are under process at the Pakistan Stock Exchange at the moment

In Pakistan, the State Bank of Pakistan (SBP) also came to the rescue with packages for industries, mainly the construction sector that employees the largest number of labourers and also helps three dozen downstream industries to keep going. The rapid reduction in interest rates to a low single-digit number provided the grease to keep the wheels of commerce turning. Many companies from the primary sectors of the industry such as textiles, pharmaceuticals, power generation, automobile assemblers, cement, engineering, fertilisers, food and fast-moving consumer goods were able to stay afloat.

One former regulator said that cash is the king in the M&A world. Corporates with loads of cash on their balance sheets can bide their time to find the right acquisition targets at the right price. But in board rooms, it is almost impossible for all members to give their consent to be sold off.

“The argument in the early days of the pandemic was uncertainty. How long will the pandemic last; how much would it cost the company; would it dent profitability? Directors asked. Many thought it best to sit on the cash pile instead of having to face a cash crunch after the joy of acquiring a competitor fades.

“It is thought wiser to ride out the challenge of pandemic before taking the leap to acquire an old rival or enter into a fresh line of business,” one member of the board said. He affirmed that while big corporations with tills full of cash may enter into 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 should not result in a monopoly. The companies that intend to go into M&A or Joint Ventures in the country have to apply for clearance from CCP under section 11 of the Competition Act, 2010.

An old hand at the market said that although M&A may have been few and far between, there were a staggering 14 new initial public offerings (IPOs) in 2020-21 which was the highest since 12 Offerings in 2006-07. In 2020-21, IPOs generated a demand of Rs44bn against the Rs20bn.

Analysts at Arif Habib Limited said: “Most companies have raised funds for the expansion of their production capacities as the low-interest rate in Pakistan has encouraged investors to finance expansions on the expectation of a better return in the future”. A fund manager said that he believed that eight to 10 applications to make IPOs were under process at the Pakistan Stock Exchange (PSX) at the moment.

All of this suggests that corporates were more inclined to comfortably mobilise money from their offer of shares to the public and banks in debt-to-equity, in the low-interest rate scenario instead of relinquishing the control of their business in M&A.

While there has been no major M&A activity, in mid-May this year Wyeth Pakistan Ltd, a listed company in the pharmaceutical sector, informed the PSX that the parent company, Wyeth LLC, USA resolved to consider the purchase of shares from all minority security holders in order to increase its ownership and de-list the company. Such buybacks and delistings were common mainly in the pharmaceutical industry many years ago.

Ali Nadeem, Head of Sales at First National Equities Limited said that the number of listed companies at 558 was much too small for buyers and sellers to mix and match. He however said that a couple of “reverse mergers” were seen in recent times. The sponsors of Bunny’s Limited —the bakery products manufacturers acquired a non-operational already listed company Taha Spinning Mills.

Similarly, a “reverse merger” transaction took place in the listed but shell company, Service Fabrics where the sponsors bought the company. Nadeem says that the major reason for the reverse merger is to avoid taking the long road of listing through IPO. He affirmed that in all mergers, acquisitions and even reverse mergers, the buyer enjoys the greater bargaining power.

Published in Dawn, The Business and Finance Weekly, July 19th, 2021