Carve-out, bolt-on key themes driving M&As: BDA Partners

Amid escalating market uncertainties, M&As are not just a growth tactic but survival tools for businesses, Euan Rellie, co-founder and managing partner of investment banking advisor BDA Partners, told The Korea Economic Daily during an interview on June 21.

He pointed out that two kinds of M&A activities will be highlighted going forward: bolt-on acquisitions by strengthening what companies are good at; and business unit carve-outs by divesting what they are not good at. He said that one example is IT service provider Samsung SDS Co.’s sale of its home IoT business to real estate platform Zigbang in February, which benefitted both companies' businesses.

Although the global M&A market shrank by 29.8% in the first quarter of 2022 compared with the same period last year, investors will return to the M&A market after re-establishing and reorganizing their M&A strategies, he said. The South Korean M&A market stood out with expansion in the first quarter, thanks to a number of innovative IT platforms, he added.

The following is an edited transcript of the interview with Rellie.

▲ The global M&A market size decreased in the first quarter of 2022, compared to the same period in 2021. Do you think this trend will continue in the future?

“The global M&A market shrank to 1.26 quadrillion won ($970.5 billion) in the first quarter of 2022. It is a 29.8% decrease from the same period of 2021 due to escalated uncertainties such as the acceleration of inflation, interest rate hikes, the Russia-Ukraine crisis, COVID-19 and others, leading to a year-to-year decline.”

“However, there was a steep but temporary decline of M&A activities during the early spread of COVID-19, but prompt resilience has been shown. That being said, I expect that investors will return to the M&A market after re-establishing and reorganizing their M&A strategies.”

▲ Corporate valuations have been heavily affected by the recent acceleration of inflation and aggressive interest rate hikes. What kind of M&A strategy can attract attention in this environment?

“In order to overcome uncertainty in the market, the M&A strategy of choice and concentration would get more emphasis.” 

“Firstly, M&A is not just a growth tactic in this kind of environment but a survival tool for businesses. In that sense, two kinds of M&A activities will be highlighted: bolt-on acquisitions by strengthening what businesses are good at; and business unit carve-outs from corporations, such as divesting what they are not good at."

"One good example is Samsung SDS’ divestment of its home IoT hardware business to Korean real estate service platform Zigbang. Through the deal, Samsung SDS could focus more on its major B2B model and Zigbang gained potential to grow its smart home system.”  

“Secondly, M&A activities should emphasize the importance of due diligence. Actions in the due diligence stage become important to identify potential risks and shorten the gap between closing and signing. Also, ESG is getting more important, and incorporating ESG features in due diligence is one of the global trends in the M&A market.”

▲ ESG has become a buzzword in the M&A market. Do you think this trend will continue in the long term? 

“A new ecosystem was created through ESG, going far beyond the simple existing M&A industry. The concept of a circular economy is being established through ESG while the existing value-chain was based on a uniform structure from the seller to the consumer."

"Therefore, I believe that there is still a lot of space to be improved on and to flourish, and more various structures of ESG M&A will be delivered at the global level. BDA also played a critical role in the ESG M&A market as an advisor for SK Ecoplant’s full acquisition of e-waste recycling firm TES Envirocorp and the $50 million Series B funding of climate change investment firm Pollination."

▲ What is your opinion on the Korean M&A market in the future?

“Korea has a fascinating M&A market with strong attractiveness proven by its positive growth record amid the negative growth trends of the global M&A market. The Korean M&A market reached 21.6 trillion won in the first quarter of 2022, compared with 19.3 trillion won in the same period last year. Various deals successfully drew global attention for the Korean market, including Saudi Arabia's sovereign wealth fund PIF’s investment in game developer Nexon Co. and Delivery Hero’s acquisition of food delivery service firm Woowa Brothers."

“This trend is not only backed by high-speed wired/wireless communication networks and top-level smartphone penetration, but also well-established consumer market-leading global trends. These factors lead to strong attention from global startups and multinational corporations in Korea. The IT platform sector is expected to continuously draw immense attention from the market. The Korean market has been consistently generating innovative platform leaders such as online flea market Daangn Market, real estate service platform Zigbang and crypto exchange platform operator Dunamu."

"Other than the IT market, M&A transactions related to corporate governance issues are projected to gain momentum in the market. Korean conglomerates often have parent/subsidiary listed simultaneously, and this kind of listing convention in the stock market could generate a double-counting effect, which will eventually damage the interest of minority investors."

"Companies have been implementing various internal control systems that are still insufficiently monitored by market participants. I personally see activist funds as the most effective measure to fill the gap between the efforts toward internal control and market monitoring. The increasing trend of activist funds will facilitate governance-related M&A transactions, and is also projected to become a key driver in enhancing the soundness of the Korean capital market."

Rellie is co-founder and managing partner of BDA Partners, based in New York. He is also president of broker-dealer BDA Advisors. Before founding BDA Partners in 1996, he worked for Schroders for six years, the UK investment bank now part of Citigroup, in New York, London and Singapore. He was head of Southeast Asia execution for Schroders Asia-Pacific Regional Advisory Group and has been globally recognized as a successful deal maker. He studied at Eton and Trinity College, Cambridge.


Write to Chang-Jae Yoo at yoocool@hankyung.com
Jihyun Kim edited this article.