Microsoft South Africa has announced what it is calling the largest equity-equivalent BEE deal since the regulations governing this type of transaction were approved three years ago.
The R472-million deal, announced last week, will see Microsoft invest the money in five to 10 independent software vendors and provide assistance to turn them into globally competitive software companies in seven years.
Kethan Parbhoo, equity equivalence leader at Microsoft SA, says that because Microsoft SA is a fully owned subsidiary of Microsoft, it is not able to sell a stake in its local operations to comply with the ownership requirements laid out in the department of trade and industry’s BEE codes of good practice.
Parbhoo says the programme will invest in small, black-owned companies with the intention of growing these companies into internationally competitive players in their respective fields.
‘Microsoft is not, however, buying equity in the selected firms; what we will be doing is providing the companies with support in the areas of infrastructure and human resources, as well as assisting the companies in recruiting and retaining additional skilled staff,” he says.
The programme is not aimed at providing startup capital, he says, but rather at accelerating the growth of companies that have already established themselves. That said, Microsoft has restricted access to the programme to companies that have a turnover of less than R10-million and fewer than 30 employees, in addition to being more than 50% black owned.
‘This is intended to ensure that the companies we bring on board have got over the phase of their development where they are most at risk of failure,” Parbhoo says.
Once the companies have been selected, the team at Microsoft will work with them to create specific business plans focused on building the company into an international player within the seven-year scope of the programme.
Parbhoo was not, however, able to explain what would happen should a company fall below the required 50% black ownership, through acquisition or other factors.
‘Because we won’t have equity in these companies, we will not be able to exercise control on how they run the company. We will, however, make provision for any eventualitiesm in the agreements we sign with the firms,” he says.
‘Irrespective of whether any of the selected companies falls by the wayside over the seven-year period, Microsoft is committed to using the full R472-million on this programme,” he says.
The R472-million does not include the costs that Microsoft will incur in its support of the programme, which includes access to Microsoft staff as well as research and development, he says.
From a Microsoft perspective, he says the programme should enable it to raise its BEE rating from its current level 4 status to a level 2 status, something that would benefit its customers in their respective ratings exercises. Improving its BEE rating would also enable the company to increase its already sizeable business dealings with government departments.
Parbhoo says that although other companies in the information and communication technology (ICT) sector had completed their BEE deals some time ago, Microsoft had to wait for the rules relating to equity-equivalent deals to be published before pushing ahead with its plan.
The final figure was arrived at in consultation with the trade and industry department after the minister of communications gave his consent to the deal.
Parbhoo says that the value of the transaction is based on a valuation of the local subsidiary that was arrived at in consultations between Microsoft and the trade and industry department.
‘The reasoning behind embarking on this programme is to increase the local relevance of Microsoft in the South African market as well as to have a real impact on the lives of South Africans through increasing the skills base in the country and contributing towards growth,” he says.
Although companies applying for the programme need not be existing Microsoft partners and there is no compulsion for them to develop software exclusively for Microsoft platforms, Parbhoo says that it would be unlikely that companies not working on Microsoft-based products would be selected because it would be difficult for them to derive benefit from the relationship with the computing giant.
Compliance by multinationals
The codes of good practice issued by the department of trade and industry require that all entities operating in the South African economy make a contribution towards the objectives of broad-based black economic empowerment (BBBEE).
The codes, however, acknowledge that there may be multinationals that have global practices preventing them from complying with the ownership element of BEE through the traditional sale of shares to black South Africans.
In this instance, and provided that it can be proved that such entities do not enter into any partnership arrangements in other countries globally, the codes of good practice have made provision for the recognition of contributions in lieu of a direct sale of equity.
Such contributions are referred to as equity equivalent (EE) contributions and count towards the ownership element of BBBEE made by multinationals. The value of these EE contributions may be measured against 25% of the value of the multinational’s South African operations, or may be measured against 4% of the total revenue from its South African operations annually over the period of continued measurement.
Recommended forms of equity equivalents are:
- Enterprise creation programmes;
- Economic development programmes;
- Projects aimed at technology transfer within the small, medium and micro-enterprise sector of the local economy beyond a multinational’s core business activities;
- Programmes that promote economic growth and employment creation through developing technological innovation beyond a multinational’s core business activities; and
- Initiatives that lead to sustainable job creation.
Source: Guidelines: Equity Equivalent Investment Programme for Multinationals (Department of trade and industry)