M&A - our core business

Dikamar Capital’s core business is dedicated to Mergers and Acquisitions (M&A) and capital advisory services for companies operating in the Personal Protective Equipment (PPE) business industry.

Let’s take a brief introduction to M&A concepts and how’s PPE business.

1. Mergers and Acquisitions - What does it stand for?

2. What’s the difference between Mergers and Acquisitions?

3. What are the most common types of mergers?

4. What are the pros and cons of an M&A deal?

5. How’s M&A in the PPE business industry?

1. Mergers and Acquisitions - What does it stand for?

“Mergers and Acquisitions” is a general term based on consolidating companies or assets, that are aimed at stimulating growth, gaining competitive advantages, increasing market share, or influencing supply chains, through various types of financial transactions.

2. Is there any difference between Mergers and Acquisitions?

Yes. The terms “mergers” and “acquisitions” are often used together. However, they have slightly different meanings.

• Merger

Happens in a scenario where two companies, of approximately the same size, join forces to move forward as a single new entity. After the approval from their respective shareholders, the boards of directors of both companies approve the merger.

The most common reasons why companies merge is to share information, technology or other resources thereby increasing the overall strengths of the company. In many cases, mergers also help to overcome existing challenges, reduce weaknesses and gain a competitive edge in the market.

Companies that merge together usually consider each other of equal stature and hence they help each other out to create a synergy.

Therefore, mergers mostly happen on friendly terms which makes restructuring easier for both directors and employees.

• Acquisition

Happens when one company takes over another and establishes itself as the new owner. In a simple acquisition, the acquired company retains its name or alters its organizational structure. Generally it happens with a much larger company acquiring a smaller one.

Unlike mergers, acquisitions don’t always happen as a mutual decision. They stem from an “unfriendly” or hostile takeover deal, in which target companies do not wish to be purchased but may do so out of necessity, which often leads to conflicts and tensions. And so the transitions are not always smooth as the company that takes over can control all the decision-making on staffing, structure, processes, and resources.

3. What are the most common types of mergers and acquisitions?

Mergers can be structured in a number of different ways, based on the relationship between the two companies involved in the deal:

• Horizontal merger

Two companies that are in direct competition and operate in the same market (and selling similar products or services). This type of merger is attractive for merging companies aiming to build economies of scale and decrease market competition.

• Vertical merger

Two companies in the same industry who operate in different stages of production. A customer and company or a supplier and company. This type of merger is ideal for streamlining operations, boosting efficiencies, and cutting costs across the supply chain.

• Congeneric mergers

The acquirer and target company have different services or products, but operate within the same market and sell to the same customers. They could be indirect competitors, although their products often complement each other.

• Conglomeration

Two companies that have no common business activities and industries.

In pure conglomerate mergers, the two firms may continue to operate separately within their own markets, whereas in a mixed one, they may look to expand product or market reach.

• Market-extension merger

Two companies that sell the same products in different markets. Commonly, this type of transaction occurs across multiple geographic regions.

• Product-extension merger

Two companies selling different but related products in the same market. A specific product is added to the product line of the acquirer from the acquired company.

4. What are the pros and cons of an M&A deal?

The pros:

• Growth

  • M&A allows the newly formed business entity to boost market share, increase their geographical footprint, overtake or buy out competitors, and acquire new talent, technologies and assets. In contrast, it can take years or decades to double the size of a company through organic growth.

• Synergies

  • “Two heads are better than one”.

  • By combining business activities, overall performance efficiency tends to increase and across-the-board costs tend to drop, due to the fact that each company leverages off of the other company's strengths.

  • Can consolidate (or eliminate) duplicate resources like branch and regional offices, manufacturing facilities, research projects, etc.

• Increase Supply-Chain Pricing Power

  • By buying out one of its suppliers or distributors, a business can eliminate an entire tier of costs.

    • Buying out a supplier (vertical merger), lets a company save on the margins the supplier was previously adding to its costs.

    • Buying out a distributor, a company often gains the ability to ship out products at a lower cost.

• Eliminate Competition

  • Many M&A deals allow the acquirer to eliminate future competition and gain a larger market share, but a large premium is usually required to convince the target company's shareholders to accept the offer.

• Domination

  • To dominate the sector.

  • A combination of two “giants” would result in a potential monopoly, and such an operation would have to be subject to intense scrutiny by regulatory and anti-competitive authorities.

• Tax Purposes

  • Companies also use M&A for corporate tax reasons, although this may be an implicit rather than an explicit motive.

The cons:

• Time-consuming

  • The M&A process is intensive, and can take months or even years to finalize.

• Employees acceptance

  • Most employees don’t like change. Therefore, mergers and acquisitions are mostly not so welcomed by them;

  • Build trust, retain people, align cultures, and keep employees motivated.

• Risk

  • The acquiring company should have a full understanding of the target company, which is why it’s normal practice for companies to seek external services to evaluate the risk of a deal.

• Challenging

  • Integrating two companies with different visions can be challenging, with lots of deals running into problems during the integration stage of the deal.

• High failure rate

  • Due to the demanding requirements.

5. How's M&A in the PPE business?

It is already known that the majority of businesses were affected by the COVID pandemic. And with PPE providers, things were not different. While demand for respiratory protection grew up dramatically since the population sought protection against the virus, demand for other PPE, such as helmets, fall protection, and hearing protection products, declined as construction slowed down and some non-essential manufacturing operations were temporarily closed.

The pandemic also exposed the vulnerabilities of the highly fragmented distribution system, so to mitigate these supply chain challenges disruptions, PPE providers focused on expanding existing domestic production and finding new near supply relationships.

In addition, manufacturing of certain categories of PPE, including respiratory, eye, and hand protection, will continue to be near-shored in the coming years to ensure national security. As a result, the PPE industry’s trade balance is expected to shift from being a net importer to being a net exporter by 2025.

End-user preference to procure all their PPE needs from one supplier has propelled the PPE manufacturers to go for portfolio-widening acquisitions, and become one-stop shops for consumers. PPE manufacturers are keen to acquire companies & brands to enhance their existing portfolios.

Together, these factors are positive from a merger and acquisition perspective.

Large strategic acquirers continue to seek category leaders and quality-focused manufacturers to grow their market share and secure supply chains.

Larger PPE distributors became actively engaged in mergers & acquisitions and achieved vertical integration by enhancing manufacturing capabilities.

Big private equity groups continue to aggressively search for PPE platforms and additional opportunities for existing platforms. This interest is driven by the safety of PPE investments, which tend to grow alongside economic expansion and infrastructure spending, and often experience only modest declines during periods of recession due to the strong and growing regulatory standards that industries have to respect.