Reasons business mergers in Africa fail
Media in Africa has been reporting on planned merger in tech and other industries since the beginning of this year with Nigeria and South Africa leading the way. Mergers appears to be this year’s big theme. But the past trends shows such initiatives have failed. A successful merger is a highly effective way to deliver growth in shareholder wealth through increased profitability which leads to enhanced earnings per share and return on investment. The other option is for a business to introduce new products or markets organically which can take years to achieve. Mergers in Africa can be an immediate and lower risk method for delivering growth. African businesses are gearing towards becoming innovative, rather than operating in the traditional ways. They have suddenly realised that for their brands to survive and be recognised by the next generations, they will need to revolutionise. Overall, it is difficult for big businesses suddenly to turn around and become innovative with the limited resources they have on hand. This is where collaborations with new entrants in their segments come in the picture.The key drivers for management to seek merger opportunities is driven by among others accessing new markets, which include new products, services or even geographic markets as well as increasing market share by acquiring a competitor. It is also inspired by expanding service offering to existing services with the acquisition of complementary businesses and to increase profitability through synergies, such as utilisation of unused manufacturing capacity.For such collaboration to happen, they must understand that this must be a win-win situation, where both the new entrants and the corporates benefit. They must first be able to understand their own strengths, and then do enough research to find out which start-ups would benefit from those strengths while at the same time benefiting the larger company.
The ultimate success of mergers are typically dependent on paying the right price and having the successful integration of the businesses in addition to effective management and planning pre and post-acquisition. Big businesses tend to have higher funding and are much more flexible. However, the downside of collaborating with big businesses is that, they are still big brands. This means that their operations will still be in the traditional ways unlike new entrants. They will have limitations in the industry they are investing in and for example, Kenyan banks are said to prefer start-ups that are financial-technology related. Turnaround time in investing would be slower, and it would take them longer than normal investors to get their investments approved.This trend is definitely catching on among many Africa big players. It is amazing to see African companies in industries one would never expect joining in, such as banking, food and beverages, cosmetics, energy or construction firms, becoming extremely proactive in the new entrants businesses. In case your blogger is familiar with, the failure of a merger in South Africa came down to operational issues associated with integration of the business, including a mismatch of cultures, insufficient capacity to manage the merger, an inability to realise the planned synergies.The evaluation of the transaction failed to involve key management in establishing an integration plan for the target post merger. The initial plan which was considered to be the most important document to ensure the success of the transaction wasn’t effectively implemented. The plan had set out actions from simple administration steps to more strategic issues. A high level of management involvement and buy-in in all stages of the merger process is the most critical factor in the success of mergers. In my view, management’s key responsibilities throughout the transaction and integration process should review the valuation of the target and understanding and outlining other key transaction drivers as well as avoid paying for synergies unless strategies can be implemented prior to transaction completion.