The large number of family businesses on the island, a lack of formal succession planning, and a generational shift in mentality are just some of the reasons why Malta’s economy is likely to experience an increase in merger and acquisition (M&A) activity, a panel of business experts shared.

Discussing the art of the deal and the state of M&A activity on the island at a recent talk organised by the Malta Business Network, the role of emotions, ego ad legacy cultural issues were cited as leading reasons as to why so many deals fall through.

The discussion was held at OKA’s at The Villa and was moderated by Thomas Cremona, Founder of idisav.

Partner and Head of Advisory at KPMG Malta, David Pace, who shared his insights on the panel, shared that between 2008 and 2016, 155 M&A deals were announced, with around 15 per year being captured.

David ‘guestimates’ that in recent years, of the 60-100 deals conceived each year, around 15 to 25 are captured.

“This is exponential growth,” he remarked.

(From left) Discussion moderator Thomas Cremona, Founder of idisav; David Pace, Partner and Head of Advisory at KPMG Malta; Simon Schembri, Partner at Ganado Advocates; Joyce Grech, Head of Commercial Banking at HSBC Bank Malta plc; JJ Miceli Demajo, CEO of M Demajo Group and Louis de Gabriele, Managing Partner at Camilleri Preziosi Advocates

What is prompting the increase?

David chalks it down to generational shifts, saying that some deals are motivated by succession planning or the different mentality of younger generation business leaders. Indeed, it is estimated that around 75 per cent of Malta’s businesses are family owned, and when there is no clear path forward for a new family member to take over, business owners and their next of kin start to consider their options.

He also points towards market dynamics, where certain developments encourage the exploration of M&A activity. Finally, he also mentions the allure of passive income.

JJ Miceli Demajo, CEO of M Demajo Group, a highly diversified group incorporated back in 1910 in its fourth generation of family leadership, shares that the Group’s views on M&A have shifted over the years.

When the conditions are right, the Group is now far more open to acquiring a business considering how much less time and effort is involved when compared to building something from the ground up. Traditionally, the Group has been in the business of building its own activities, but are today opting for a more balanced approach.

Ego and emotions

Managing Partner at Camilleri Preziosi Advocates, Louis de Gabriele, also a panel member, agrees that local M&A activity is set to heat up, but points to the various reasons why so many deals do not result in success.

From the initial contemplation of a deal, to sitting down around the table, to ironing out the fine print, a lot can go wrong.

Focusing on the impact of an inflated ego, he points out that there are several businesses on the island that were previously making money but are now struggling.

“They are ripe for acquisition, but there’s ego in the way. Businesspeople want to maintain a certain reputation in entrepreneurial circles, so they end up supporting their business to keep their social standing.”

He questions the logic of keeping a struggling business, when it makes more sense to “move in for the kill” – which sometimes means selling their business, in the interest of retaining their status as an entrepreneur.

“I have seen so many businesses fail, and family wealth being thrown away, simply because of this. It is a huge pity. There are so many emotions and ego during M&A negotiations…unless you bring these elements down and cut to the chase, the transaction won’t work”.

He stresses that ultimately, if there is a willing seller and buyer, the deal will work. “But do you have a willing seller?”

A generational shift in leadership across many family businesses on the island, both large and small, has been a major driving force behind a shift in attitudes towards M&A activity in recent years, the panel agreed.

And, while Malta’s younger business leaders are more open to buying an up-and-running business, or selling, legacy issues are also slowing down deals from being concluded.

Partner at Ganado Advocates, Simon Schembri, points out that in the older days, many family business owners did not keep their books in order, and did not have formal relationships with suppliers, working through word-of-mouth arrangements.

He points to a situation where, when a business moves from one generation to the next, the younger family members are not always interested in taking up the mantle, “so you end up in a situation where for these businesses to be sold…they have to put their house in order.”

Simon explains that this does not just means updating the books, but introducing governance practices in line with today’s ESG standards, such as keeping proper minutes of meetings and setting up certain structures.

“When we are approached by businesses who want to put their house in order…there is a lot of work to be done.”

Financing

Should both sides of a negotiating table manage to set their emotions and ego aside, another major component for M&A activities is the role of financing. In today’s environment, how active is bank financing for a corporate acquisition, especially when real estate is not included in the deal?

Joyce Grech, Head of Commercial Banking at HSBC Bank Malta plc, says the role of bank financing is significant, but each deal is different.

“There are many points to consider. It depends on the balance sheet of the acquirer and the business that is being acquired, the value it will add, how much it strategically fits into the wider acquiring business and also the competence of the buyer in managing the new business.

“If they have the capacity to borrow and they are competent in the business they are buying, bank financing is certainly an option, however we do expect the acquiring company to put up it’s own capital, and have skin in the game.”