KUALA LUMPUR, 4 February 2020 - Following disruptive world events, the Malaysian marketplace has become cautionary, from risks from the US-China trade war, to policy changes after the 2018 general election. Multinational companies offloading their assets and subsidiaries in Malaysia as part of strategic changes have made the market an arena for M&A opportunities. However, these opportunities may not always be achievable. Instead, fixing the problem, or even closing the business, may prove the more viable approach.
A company may experience distress due to various issues, from technological disruptions to changes in customer preferences, resulting in losses, negative free-cash-flow and increasing leverage. Failure to address these issues may bring about a liquidity crisis and eventual winding up of the company.
FIX, SELL OR CLOSE?
Change is constant – even the most successful companies will need to reassess their underperforming and non-core assets. To facilitate better decision-making, companies are encouraged to consult advisors in identifying options, implementation planning, and execution of the relevant strategies.
Strategies to fix a business will help identify and implement profit improvement opportunities, cost reduction, footprint optimisation, and cash and working capital optimisation, among others. Improvement initiatives may also include full or partial disposal of non-core and underperforming operations, in order to unlock trapped value and raise cash to fund the entity’s core operation.
Advisors, such as M&A specialists, may assist companies with disposing of their non-core assets or businesses. M&A situations generally conclude with a strategic buyer, usually from the same industry, acquiring the business or assets, and in some cases, may even end up acquiring the entire company.
Upon deciding on business closure, detailed planning is often required to identify the associated cost, process and risk. Companies are encouraged to engage on-site specialists to plan and project manage, which enables management to focus their attention on growing the company’s core business.
CLOSURE OF A BUSINESS – MANAGED EXIT
Business closure may be triggered by a variety of external factors, such as an economic downturn or a shift in strategic focus. There is also increasing pressure on shareholder value, driven by activist investors who push for divestment of non-core assets with immaterial or subpar profitability.
There are several important factors to consider when exiting a business:
(a) Reputation – Managing brand, public relations, and employee, political and customer relations.
(b) Employee – Mitigating impacts on employees, including retention and recruitment among others.
(c) Financial – Addressing employee severances, contractual and contingent liabilities, tax and potential impacts on financial stakeholders and markets.
(d) Commercial – Protecting commercial and sales relationships with customers and supply chains.
(e) Governance – Addressing the needs and interests of the board and regulators.
(f) Scale / Reach – Administrating the complexities that may arise as a result of existing in different jurisdictions i.e. subsidiaries located in another country.
The following questions should be taken into consideration when in an exit situation:
(a) What will it cost?
These could relate to penalties or costs involved due to early termination of contracts, retrenchment / separation benefits, etc.
(b) What are the impacts on key stakeholders?
Management teams should consult and provide notice to stakeholders upon making the decision to exit, as well as review all contracts to ascertain commitments / legal issues involved and develop a strategy to address / mitigate risks of any non-compliance.
(c) How do we protect our reputation?
Poorly executed exits can lead to reputational damage, while the closure of businesses such as public interest entities may attract press coverage and possible political interference.
(d) What do we do with the assets?
Assets may be disposed of through third parties or transfers to related entities within the group. Disposal of raw materials, inventories, plants, machineries and real properties may involve tax issues, while specialised assets may require the assistance of real estate or marketing agents.
(e) What is the impact on the core business?
When hiving off non-core businesses, companies should review their overall production requirements, supply chain, capital, sales and customer base. In the case of exits for subsidiaries owned by companies listed in Malaysia, a review of the listing requirements is necessary to avoid triggering the prescribed criteria or conditions for PN17.
(f) How do we manage employees?
Depending on the scale of business to be retained, there are a number of separation schemes available. The level of employee retrenchment / separation benefits to be paid out is another key consideration, and should be calculated carefully to adhere to regulation.
(g) What are the potential risks?
Issues should be addressed at an early stage with the appropriate professional assistance. This is to mitigate the reputational risk of being drawn into costly and time-consuming legal suits.
(h) How long will it take?
Depending on the complexity involved, a usual winding down exercise may take between 6-12 months to complete, with liquidators appointed to carry out the process in accordance to regulation set by the Companies Commission of Malaysia under the Companies Act 2016.
In this day and age, boards are constantly under pressure from many angles, and must proactively deal with underperforming business operations to minimise the drain on resources, asking themselves the question – should we fix, sell, or close?
The views and opinions expressed in this article are those of Eddie Goh, Associate Director, Restructuring Services, Financial Advisory of Deloitte Malaysia.
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