Malta heads to further business consolidations

Thomas Cremona takes a deep dive into Malta's evolving business landscape, where consolidation is becoming the norm. With family succession declining, regulatory demands rising, and foreign competition increasing, Maltese businesses are navigating a new era. Cremona examines how strategic mergers can drive growth, efficiency, and resilience in this dynamic environment.

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Where are we?

Malta's business landscape is at a crossroads. With various sectors under pressure, the trend toward consolidation is accelerating. Businesses merge from family-owned enterprises to professional services and retail to survive and thrive. Key drivers include family succession challenges, the demand for specialisation, regulatory burdens, foreign competition, and shifting cultural attitudes. Consolidation is no longer just an option; it is becoming necessary for many.

Family succession: A vanishing tradition

Family businesses have long driven Malta's economy, but this cornerstone of the local business ecosystem is beginning to crumble. Founders who launched their ventures in the 1990s and 2000s are now retiring. Ideally, they would pass on their businesses to the next generation, but this is increasingly rare.

Many younger family members opt for different career paths, driven by their aspirations or a desire to avoid the challenges of running a business. As a result, founders are often left with no choice but to sell. This trend is pronounced in sectors such as retail and healthcare, particularly pharmacies. Without successors, consolidation becomes a logical exit strategy, offering founders a way to monetise their years of hard work while ensuring the business continues under new ownership.

The demand for specialisation

As Malta continues to climb the global value chain, the need for specialised knowledge, technology, and processes becomes increasingly critical. To remain competitive, businesses must invest in state-of-the-art software, hardware, and continuous training. However, these investments are costly, especially for SMEs with limited resources.

Here, consolidation offers a lifeline. By merging, companies can pool resources and share the burden of costly investments. This enables them to provide higher-quality, more specialised services at competitive rates. In a small economy like Malta, where achieving economies of scale can be challenging, consolidation offers a clear path to staying relevant and profitable.

Regulatory pressures: A growing burden

Over the past decade, regulatory requirements across various industries—such as architecture, accountancy, and legal services—have intensified. Compliance now involves extensive reporting, auditing, and adherence to strict standards. These activities rarely generate direct revenue, putting additional strain on profit margins.

The burden of compliance can be overwhelming for smaller firms. Consolidation offers a way to distribute these costs across a more extensive base, restoring profitability and operational efficiency. By merging, firms can create more robust entities capable of meeting regulatory demands without compromising their bottom line.

Foreign competition: Raising the stakes

Malta's strategic location and robust regulatory framework have made it an attractive destination for foreign businesses. From retail to hospitality, international companies are entering the market, leveraging their global economies of scale. These firms bring superior bargaining power, advanced systems, and extensive resources, posing a significant challenge to local competitors.

The grocery sector is a prime example, with foreign operators intensifying competition and driving local consolidation. To survive, Maltese businesses must adopt similar strategies, merging to form more vital entities capable of competing on equal footing.

Changing cultural perspectives

In the past, selling a business was often viewed as a failure or a sign of defeat. However, cultural attitudes are shifting, particularly among younger entrepreneurs. Today, divestment is increasingly seen as a savvy business move—a way to capitalise on a successful venture and pivot to new opportunities.

This changing mindset fosters a more dynamic business environment where mergers and acquisitions are viewed as strategic tools rather than a last resort. Entrepreneurs are more willing to divest non-core activities, streamlining their operations and focusing on areas where they can add the most value.

Financing consolidation: New tools for growth

Consolidation requires capital, and Maltese businesses are exploring diverse financing options. While traditional methods such as cash and debt remain prevalent, innovative approaches like seller financing and investment funds are gaining ground.

Investment funds, which have already significantly influenced the telecom sector, offer a promising avenue for mid-market acquisitions. By tapping into these resources, businesses can more effectively finance mergers and acquisitions, paving the way for sustainable growth.

The role of MCCAA

The Malta Competition and Consumer Affairs Authority (MCCAA) is vital in regulating consolidation to ensure fair competition. As of May 2024, the MCCAA registered five significant transactions, signalling an active year ahead.

However, many mid-market deals fall below MCCAA's reporting thresholds. These unregistered transactions represent a significant portion of the consolidation activity shaping Malta's economy, highlighting this trend's dynamic yet often under-the-radar nature.

The strategic edge of consolidation

Mergers and acquisitions are complex, requiring careful planning and execution. Yet, they offer a strategic edge for businesses prepared to seize the opportunity. A clear consolidation strategy allows companies to identify partners, streamline operations, and enhance their market position.

Consolidation is not merely about survival; it's about thriving in a competitive and ever-evolving market. Businesses embracing this approach can achieve greater resilience, unlock new growth opportunities, and position themselves as industry leaders.

The time to act is now

The forces driving consolidation in Malta are unlikely to abate. From regulatory pressures and succession challenges to the need for specialisation and the influx of foreign competition, businesses face a rapidly changing landscape.

Consolidation offers a path to sustainability and growth for those willing to adapt. By acting now, companies can meet today's challenges and lay the groundwork for future success.

The question is not whether to consolidate but when—and the answer is sooner rather than later.

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