Bain Korea partner says PEFs can create virtuous cycle in market

By Kim Bo-eun

Businesses are increasingly reviewing diversifying their supply chains after experiencing how heavy dependency on one region can wreak havoc in the wake of unexpected events, in particular the global COVID-19 crisis. Because it is difficult to give up manufacturing facilities in China, considering their existing presence and labor costs, many are seeking to secure new vendors in new locations.

While companies will inevitably examine their own supply chains, Bain & Company Korea's Partner Lee Hyuk-jin says it is time for Korean firms to check whether they can play a role as vendors as foreign companies seek to rearrange their suppliers.

"Korean companies should be thinking about whether they can benefit as foreign firms seek new vendors amid shifts in their supply chains," Lee told The Korea Times in an interview on May 28.

Korea earning recognition as a safe and transparent country in the COVID-19 pandemic could serve as a positive factor, he noted.

Reviewing new opportunities is part of the long-term strategy that businesses should be considering in addition to taking immediate measures for survival in the pandemic era, Lee said

"It's not only about recovering fast, but faster than others to take a greater share. M&As can be one way of achieving this."

Businesses will need to take into account that the COVID-19 situation makes due diligence more difficult.

"The M&A process will be shorter than usual, as distressed firms are put out on the market. Potential buyers will have to conduct due diligence in a short period of time with limited information as it is not clear to what extent the company will be able to recover," the partner said.

"This is why preparing in advance for M&As has become more important than ever."

Lee also noted that now is a good opportunity for zero-base budgeting, which checks every cost based on need, as part of immediate measures to protect a firm's business from the damaging effects of the coronavirus.

"Zero-base budgeting is highly painful, but if this takes place amid the COVID-19 situation it will likely be accepted by employees," he said.

M&A market amid COVID-19

Deals have stopped for the first half of this year, as the coronavirus crisis makes valuation disadvantageous for firms seeking a sell-off.

However, distressed businesses that do not have the option of putting off the plan will present attractive opportunities for capital-loaded private equity firms and conglomerates.

This presents risks of monopoly as companies with brand value are likely to acquire those without, as the latter are hit harder by COVID-19.

There have been movements in the U.S. to possibly curb the rise of monopolies; but Lee said private equity firms play an important role in the market.

"Private equity firms can bring a virtuous cycle in the M&A market by taking over distressed firms. This can be a natural process," he said.

Trends in M&A market

Lee said "scope acquisitions" through which companies seek to gain new capabilities are defining the M&A market.

Scope deals intend on purchasing another business as a launching pad to new markets, or to offer new products or services. This differs from scale acquisitions which are intended on achieving a larger presence in a market or sector to achieve economies of scale.

The partner said scope acquisitions have become essential for Korean businesses in a low-growth environment.

"Formerly it was a matter of choice; now this has become indispensable for Korean firms," he said.

He explained a local company can no longer compete with foreign firms by merely undertaking R&D.

"It is a time battle. A company can earn new capabilities in just one to two years through scope acquisitions, as opposed to R&D which could take up to 10 years," Lee said.

"Companies need to pursue scope acquisitions if they want to grow, based on new business. Eighty to 90 percent of firms on the Fortune 100 grow through these deals."

He said scale deals do not work for Korean companies because of labor regulations that make it difficult to reduce costs after acquiring firms in the same sector.

Scope acquisition strategies are taken even in the consulting industry, where not much M&A activity takes place. Such strategies are employed to secure new digital capabilities.

"Consulting firms strengthen digital consulting capabilities by acquiring new digital-based technologies," Lee said.

This can also be achieved through partnerships. Bain has partnered with German engineering and technology multinational Bosch for consulting on the digitization of operations, for which the latter has set the pace. Bosch has digitized 200 of its factories around the world.

Cross border deals are also crucial for Korean firms who need to turn to overseas markets for growth.

"Companies can strike M&A deals here, but they also need to acquire overseas entities. This is also a safer way to enter overseas markets than venturing out alone," Lee said.

"Of course, it is risker than deals made here, as it requires integration and a more advanced level of management, but this is essential considering the size of Korea's domestic market."

The Korea Times