Acquiring and Merging, the new normal

We have written a lot about the private sector and its role as an engine of the economy, although governments often tend to forget this and pretend that the state will bear the economic growth, obviously inefficiently, which puts unnecessary weight on public finances and then on taxes. Even though I am convinced that the government has to be as small as possible, it is easier to say it than to do so, especially under the current circumstances, but if there is a will, this can be done.

The government should focus on alleviating the life of the private sector so that they could be able to grow and generate taxes and create more jobs. Employment generates tax revenues for both staff and businesses. And when there is employment, the wealth of the nation grows, and therefore the wealth of all citizens.

The government wanted to bring wealth to those most in need. In the case of Panama it is done through a large number of subsidies, none of them with an expiration date, unfortunately. Besides, we have great challenges in fixing two key points to bring equality to all Panamanians – health and education. And even though those challenges are not the fault of the private sector, it is best for these challenges to be fixed in the private sector.

Let's quickly review what the private sector might need in order to do so. The first is to provide the financial resources necessary to continue operating in an environment where demand has been significantly reduced, due to the increase in unemployment (which must still be around 25% or so).

In several countries around the world, resources have passed on to companies to subsidize the forms and no more people are unemployed, but this is not the only financial relief needed, as there are the unpaid bills that accrued from being quarantined for about 7 months without income.

Another issue would be being able to better restructure debts, i.e. financial institutions sit down with each client to structure debt payments so that the client can meet and the financial institution is not affected with unnecessary reserves.

The current bankruptcy law is not functional, as what we need is an image and likeness bankruptcy law of Chapter 11 of the United States, which does is that all the accounts payable are taken into account, and they get into a "sack" and are paid according to the revenue that the company generates. Something like that would allow a company to recover for the benefit of the entire local economy and we would all win – company, employees, creditors, and economy. This should include employee debts, so that if the form cannot be maintained, for some reason, the employer has time to payout employees, without the company breaking.
But the private sector does have to make changes to the way it work (something it, unfortunately, hasn't done, nor does the government seem to do). The game has changed radically. Everything is different, and entrepreneurs (and even employees and government) have to understand it.

Many entrepreneurs have likely understood that their offices are unnecessary, and those great savings can be obtained if unproductive branches are closed, or by sending employees to work from home for remote work. And we already see how banks are closing branches that had no reason to be (they had branches very close among them), or in totally expensive places (with costs per square meter that did not generate the necessary income to maintain them).

They have also realized that they can work with 2 people instead of 5 or 6, even if this does not involve throwing away employees but relocating them to new positions that even generate more revenue.

Physical stores can be replaced by virtual stores, but this also requires some kind of restructuring to do this service well, remembering that in Panama the delivery service had not worked as elsewhere in the world (the picking and delivery process will change accordingly, even with more people involved in the process).

But there are also other trends in expense savings, such as we are seeing more administrative "mergers" between professionals, for example, that each practice had its own office, staff, and what they have done is merge their administration and premises into one, maintaining a single name, or maintaining each their legal entity (and then distributing the common expenses). What this "fusion" does is to cut expenses radically and allows for a more efficient operation for each professional.

The other, a little more radical, is to make a real merger of the operations, moving to a unitary legal entity, where each merger has a % of the new company, according to a valuation of the companies. Or simply, acquisition of companies, where the acquirer, what it will do is "buy" income, and reduce expenses, to earn more money. This is a little riskier, especially since it involves cash outflows, however, the risk can be radically minimized with a good job in analyzing the company to be acquired and how it would be incorporated into the company that acquires it.

Before deciding this, you have to be sure that the income comes from sources other than yours, that is, that there is no cannibalism of income, but an aggregated income. The other thing is to be sure that expenses or costs can be improved by making a merger or acquisition, because if not, then it wouldn't make much sense to carry it out. And finally, it is also necessary to review whether the return on this investment in the merger or acquisition is going to be adequate and that covers the opportunity cost of the investment made.

In short, in addition to thinking or expecting that the government should help us so that the private company does not get lost in this or any other country, the private company must be clear on all the things it can do to prevent bankruptcy and disappearance of the company.

For this, you should be analytical first to see where you can get rid of costs and/or expenses that allow you to navigate the economy with low income. You should also think outside the box and look for opportunities in administrative mergers, where you can put together the efforts of two or more professional companies or services to move forward or simply initiate M&A processes with companies that make financial sense.

The important thing will be to keep the company operating, trying to band itself while the economy adjusts and returns to normal, without expecting much from the government (neither from this nor from any other), and only using the resources of private enterprise that are the ingenuity and desire to move forward.