Where are we?
Business in Malta is heading for further consolidation in a number of industries, due to a host of factors that include family succession not being an option, industry specialisation, increased regulatory considerations, new market entrants, and changing cultural sentiments.
Family succession not being an option
As the business owners who founded their companies in the 1990s and 2000s reach retirement age, one key consideration will be whether to pass on their shareholding to the next generation. This is not always an option, especially if there is a lack of interest from the current generation. Thus, the owner will need to seek alternative means to cash-out the value accumulated in their businesses.
On this note, the local pharmacy sector has seen significant consolidation where one of the exit considerations has been that the founders’/owners’ children have not adopted their parents’ profession.
Specialisation concerns
As the Maltese economy continues to develop and the country advances further up the value chain, the need for specialised personnel and associated hardware or software will continue to place an added competitive burden on businesses. With limited economies of scale for Maltese businesses and the general expense in ongoing training and financing the needed equipment or software, consolidating certain businesses will enable the companies to pool their shared resources to offer an enhanced specialised service at a competitive rate.
Regulatory considerations
Viewing the professional fields such as architects and accountants, there have been a host of regulatory introductions over the past years that has resulted in increased scrutiny, responsibilities, and compliance. Oftentimes, these regulatory requirements cannot be turned into revenue-generating activities, leading to increased pressure on a firm’s profit margins. To absorb the cost of compliance with all such regulatory requirements and to return the firm to its previous profit margins, it would appear logical to consider the consolidation of the smaller practices to benefit from economies of scale.
New market entrants
New market entrants in the form of foreign companies deem Malta to be an attractive area to expand operations. They are able to utilise their greater economies of scale such as stronger bargaining power with suppliers, and the input of their overseas head office with respect to marketing, human resources, and accounting. A typical local example of such competition, is the entry of foreign operators in the grocery market, and recent consolidation of the local grocery and supermarket sector.
Culture
Culturally, we still struggle with viewing the divestment of a business as a symbol of success, where one has successfully established their business, operated it for a number of years, and successfully sold it off. Though this mindset is changing with the younger generation who are more willing to hive off a business unit that they are no longer interested in or that they no longer see as a core activity.
Financing
In consolidation scenarios, businesses may utilise a breadth of financing mechanisms such as cash, debt (which also includes debt secured by the Malta Development Bank), barter, capital markets, and seller financing. A tool, not yet widely implemented for the local mid-market acquisitions, is the utilisation of investment funds. To date, investment funds have been active in the local telecoms sector.
MCCAA
Acknowledging the above concerns, businesses that intend to grow through consolidating within their industry will need to respect the legal provisions overseen by the Malta Competition and Consumer Affairs Authority (MCCAA).
As at 13 May 2024, the MCCAA had already registered 5 transactions this year which bodes well for an active 2024. Apart from the MCCAA documented transactions, there are also those transactions that do not reach the established legal thresholds, being a significant portion of the mid-market business community, and thus are not registered as part of the MCCAA data set.
Conclusion
Acquiring or merging a company is a time-consuming and, potentially, a tedious process. However, businesses having a dedicated acquisition strategy ensure that they are appropriately prepared when the right transaction is identified or when considering a direct approach to other companies. This will empower them to actively consolidate within their sector.
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