Mergers and acquisitions: key success factors
August 2015 | SPOTLIGHT | MERGERS & ACQUISITIONS
Financier Worldwide Magazine
The chances of failure to achieve the desired outcome in a merger are between 60 and 80 percent, or so we are told by those whose business it is to analyse these matters. By this, one understands that should a merger fail to materialise, it is not necessarily that the merger is a complete failure but rather that it fails to measure up to the expectations of the parties involved.
These are not outcomes which are peculiar to South Africa but are based on worldwide analyses. There is no reason to believe that the position in South Africa is markedly different to the worldwide experience. Indeed, conditions in South Africa may make the achievement of a truly successful merger even more difficult than elsewhere.
Any merger, regardless of location, is faced with common challenges ranging from the appropriate structuring of the transaction from a legal, accounting and tax perspective, compliance with regulatory hurdles, and the need to agree on satisfactory commercial terms. With the growth of knowledge and service-based economies, particularly in the Western world, the importance of ensuring the retention of key staff which may embody the know-how and goodwill of a business has become increasingly important. No longer are the management and staff of a business regarded as merely incidental to the fixed and operating assets of a business. In many instances they are the assets of the business. Securing the ongoing services of a firm’s personnel therefore needs to be achieved through a mixture of appropriate incentives to remain, coupled with disincentives to leave. This is far more difficult to achieve than simply acquiring and taking delivery of, say, plant and machinery.
Although the South African economy remains a developmental one, it shares many aspects of the service economy that has become more prevalent in the Western world. Accordingly, many of the challenges experienced in the developed world are encountered equally in many South Africa mergers.
Mergers in South Africa face a number of additional hurdles which are specific to local conditions. These include the need to achieve Black Economic Empowerment objectives, and the need to structure any transaction and the merged business so that the necessary elements of the BEE scorecards are achieved. The inflexibility of South Africa’s labour laws have been frequently referred to and the statutory requirement that a purchaser of a business must take over the existing labour force on existing terms and conditions introduces a degree of rigidity in the process not common elsewhere. When one adds to this the challenges of an inadequate skills base in the country, the need to retain appropriately skilled key members of staff becomes even more imperative. In certain sectors (such as the mining industry) policy uncertainty at a governmental level exacerbates the challenges faced in a merger scenario. When these factors, together with the usual challenges faced in mergers, are taken into account, together with the current constraints on the economy generally, it is small wonder that merger activity is currently at low ebb in South Africa.
On the positive side, South Africa enjoys the underpinning of a sound financial sector which commonly facilitates the financing of a merger transaction. The smaller size of the South African economy often means that in domestic transactions the counterparties are familiar with one another to a certain degree, and therefore have a better understanding of the likely issues which may arise out of a merger. South Africa’s culture has also given rise to managers who are adaptable and flexible, an invaluable attribute in the success of any merger.
Against the backdrop of these various factors, both international and local, what are the key success factors inherent in a successful merger? Paramount to the success of any merger is a proper understanding of the objectives of the merger. Unless a party to a merger has a proper understanding of the outcomes that it is seeking from a merger, and indeed how a merger will facilitate those objectives, there is little chance of a merger being successful. Accordingly, a rigorous analysis by all the parties as to why they believe the merger would be advantageous to each of them is essential. Expectations need to be reasonable, and every effort should be made to identify the true underlying business rationale for a merger and its ultimate objectives. Flowing from this, an analysis of the parameters of the transaction necessary to achieve the desired objectives is necessary. The key parameters of the transaction need to be identified, without which the likelihood of success would be significantly diminished. Thus, if the retention of certain key individuals or members of staff is an essential element, the transaction needs to be structured in such a way as to ensure the retention of those individuals. It is only by focusing on those aspects of a merger which are identified as being critical to its success, that the likelihood of a satisfactory outcome can be enhanced.
Every merger negotiation, however, involves compromises. If the level of compromise is such that the key parameters of the transaction cannot be adhered to, thus potentially placing the ultimate objectives of the merger in danger, then a party should be prepared to walk away from the transaction. Far too often, the conclusion of a transaction becomes an end in itself. It is difficult, if a significant amount of time, effort, money and emotion has been committed to a transaction, to admit that it is not succeeding and to bring discussions to an end. This, though, is what is required if the objectives of the transaction, as originally identified and articulated, can no longer be achieved. To persist with a transaction simply because one is reluctant to admit failure is a likely recipe to become part of the statistics of failed mergers.
Kevin Cron is the head of Corporate, M&A and Securities South Africa at Norton Rose Fulbright. He can be contacted on +27 11 685 8670 or by email: email@example.com.
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