Finance Minister Clyde Caruana has made it clear that a cost-cutting exercise to reduce the public deficit is under way. In a recent announcement he urged his fellow ministers to find €200 million in budget cuts.
Apart from cost-cutting measures, however, there is another imperative, and that is the need to stimulate further economic growth. Even if the economy is expected to continue growing, one cannot ignore the fact that projections have been revised downwards. This will render the government’s efforts from containing to hopefully narrowing the public deficit somewhat more demanding.
The attainment of better utilisation of the country’s resources, be they of a capital, productive or human nature, with a view to strengthening the overall competitive base of business across the economy, should be a desired win-win objective for both the private and public sector. The ultimate aim is to increase profitability, resulting in increased government revenue.
Businesses are having to operate in a highly volatile environment and deal with significant headwinds that persist in varying forms. This is placing mounting pressure to revisit business models with a view to strengthening operational efficiency levels, leaning towards the need for growing transformation, along with the adoption of a more strategic outlook, which looks way beyond short-term pressures.
Just as the government, through the Family Business Office, in collaboration with Malta Enterprise, offers incentives aimed at supporting family-owned business in their succession planning along with business continuity, likewise there is a growing need for the government to promote, facilitate and incentivise mergers and acquisitions (M&As) irrespective of shareholding structure.
The government should tangibly support businesses from all quarters of economic activity which are ready to take bold steps towards a ‘build or buy’ strategy. This is aimed not only at consolidating or growing their business, but also at rendering them more resilient and hopefully also future-proof.
Clearly, the overall focus needed, and ultimate objective sought by all businesses, should be that of better managing new opportunities while mitigating new types of risk.
To place all this within today’s realities, some historical context is needed. Rewind 30 years. The 1992 Single Market Programme had sparked off a dramatic number of cross-border deals in the form of M&As among members of the then newly created Single European Market. Fast forward, and yet again, upon the subsequent EU accession of various member states, including Malta, in 2004, one noted a similar market reaction.
However, locally, this reaction in the form of increased M&A activity was very limited and certainly nowhere near the levels experienced in other markets when faced with similar milestone transitions.
Locally, why is there this resistance to go ahead with M&As?- Norman Aquilina
But locally, why is there this resistance to go ahead with M&As? More so when one considers the overly fragmented size of our limited market, not to also mention the strategic vulnerability of many businesses which remain underutilised or under-resourced, and sometimes outrightly uncompetitive.
Is this lack of strategic foresight or simply a cultural problem? Why this seeming reluctance, from predominantly family-owned businesses, not wanting to go beyond their traditional boundaries?
M&As are often considered as one of the best and quickest strategic methods to confront the competitive pressures of operating within a liberalised market. They are increasingly becoming a strategy of choice for companies attempting to create added value and competitive advantage
Companies combining forces can expand markets along with gaining economic benefits of scale along with improved overall competitiveness. Benefits from combining the activities of different companies may range from the further development of new or existing
products/services and the synergising of resources such as through the combination of their respective workforces along with improved employment opportunities. Likewise, with respect to improved efficiencies in their operational activities and general overheads.
Basically, the objective of M&A transactions is that of creating a company that is both larger and more efficient than the two operating on the market previously. However, in pursuit of this strategy, it must be noted that apart from purely financial and commercial considerations, organisational culture is one factor identified as an important catalyst for M&A success.
Today, many companies across the globe have over the past two years broken long-standing organisational boundaries – horizontal and vertical, formal and informal. Indeed, one of the more unexpected side effects of the pandemic has been that it has steamrollered organisational hierarchies. Many businesses have emerged from the COVID crisis much flatter, many opting to go ‘open plan’.
But more significantly, hierarchies have also been under pressure from a dramatic growth in M&As since the start of the pandemic. According to January’s EY 2022 CEO Outlook Survey, 2021 was the strongest year on record in M&A terms with £4.5 trillion of deals announced. The poll of more than 2,000 business leaders in 51 countries also found that 59 per cent were planning further M&A activity this year.
The survey concluded from its findings that the pandemic has been a wake-up call for many businesses. The transformation imperative being experienced globally may very well be clearer and timelier than ever, but will this stark reality hit us locally any time soon?
Every cloud has a silver lining, and the pandemic has firmly placed business transformation as a critically important consideration. As the government deals with the challenges of avoiding public expenditure reaching unsustainable levels, ongoing cost-efficiency measures along with rightsizing public sector employment remain fundamental imperatives. Likewise, a better structured private sector, offering more productive and profitable economic activity is highly desirable and in the best interest of all.
Going forward, while the outlook remains difficult to predict, what is clear is that both the public and private sector are equally compelled to face these imperatives with more far-reaching sustainable strategies.
Norman Aquilina is Group CEO of Simon Farsons Cisk plc.