Industry Consolidation: Signals After the Crisis
The stance of today's CEOs must determine what is best for their organizations: whether to become buyers for growth opportunities or sellers to maintain some foothold. The next phase is Industry Consolidation, leading to a changed Competitive Landscape in each industry.
Currently, news about mergers and acquisitions in the technology sector is continuously emerging. The value of Global M&A deals in the first and second quarters has decreased by 35% compared to 2019, but the technology sector has only seen a 15% decline.
There are also significant deals of interest, such as Facebook's investment in India's major telecom company, Reliance Jio, amounting to nearly six billion dollars, and Amazon's investment in an SME Lending Platform in India. The major technology companies known as FAMGA (Facebook, Amazon, Microsoft, Google, Apple) seem to be increasingly proactive in acquiring new businesses.
Recently, Apple acquired three companies focused on VR and Speech Recognition, while Google invested over 180 million dollars to buy North, a startup developing Smart Glass, and is likely to acquire a major company in Cloud Management Services. Microsoft has also acquired two startups in 5G Cloud and IoT Security.
In Asia, Tencent has acquired Iflix, a Malaysian Video Streaming platform, to expand its market and customer base in Southeast Asia.
In Thailand, a new deal has emerged where the Thai startup Eko, valued at several billion baht, has acquired an Enterprise Chatbot business and merged to form a new company to expand its customer base and add new services for corporate clients.
When crises become opportunities to seize for major players, what drives the CEOs of many large companies to shift from a defensive posture and a Wait & Watch policy during economic downturns to aggressively seeking new opportunities through acquisitions? The answer lies not merely in the fact that the valuations of many promising companies have decreased, allowing for the acquisition of "good and cheap" businesses.
However, if we look deeper into the strategic reasons, financial factors may only be a catalyst. The essence of mergers and acquisitions during such times is the vision of leaders who possess "Forward Thinking."
This means seeing the bigger picture of how the impacts of The New Normal will change the Competitive Landscape of industries, how new business models will affect current businesses, and what will be the key moves for business expansion when the new board is set after Covid-19.
Analyzing the business environment factors that will emerge post-crisis is crucial for every organization, as changes will lead to mechanisms driving the industry differently than before. Businesses need a New Growth Engine to maintain competitiveness and foster growth.
Interesting data from leading consulting firm Accenture indicates that companies that engage in acquisitions during economic downturns tend to have higher returns on investment (Total Shareholder Value) than those that do not invest in acquisitions. Importantly, in past economic recessions, companies that utilized mergers and acquisitions often navigated through challenging tests and outperformed businesses that remained inactive.
Past crises have clearly led to consolidation within industries, such as the global financial crisis in 2008, which resulted in mergers in the Banking and Travel sectors.
This crisis is no different. Accenture's report analyzing the market capitalization of publicly listed companies worldwide during the first quarter of the Covid-19 crisis found significant declines across various industries: a 49% drop in travel, 24% in energy, 19% in retail, 31% in banking, and 16% in consumer products.
The lost market cap serves as a warning signal for CEOs to make decisive actions for survival and growth, as this economic downturn will redefine the nature of business competition. Leaders in sectors severely impacted by the Covid-19 crisis, such as travel, energy, retail, and banking, must not only bear the heavy burden of short-term recovery plans but also strategize for future growth and business expansion.
This is why M&A and vertical integration (upstream, midstream, downstream) or horizontal integration through acquiring competitors are decisions that organizational leaders must make swiftly. Every step taken today and in the next 12 to 24 months will indicate the long-term future of their businesses.
The critical stance for CEOs today is to determine what is best for their organizations: whether to become buyers for growth opportunities or sellers to maintain some foothold. The image we are likely to see moving forward is Industry Consolidation, leading to unprecedented changes in the Competitive Landscape of each industry.
