South African firms will have to go global, but do our=20 company directors understand how to operate across=20 international borders? Jacques Magliolo reports
International competition is rapidly becoming a way of life=20 in South Africa; however, the ability of local directors to=20 understand how the new global village will function in the=20 immediate future is in question.
The business game has changed. New ideals and pressures=20 continually redefine relationships between competitors. The=20 greatest challenge for South African companies is to adapt=20 to the need to reach a global size without abandoning their=20 corporate identities. =20
Historically, local restructuring of companies has occurred=20 through mergers and acquisitions. Foreign companies have=20 tended to restructure through cross-border takeovers. They=20 have increased their market share “mainly through=20 acquisitions and only exceptionally though mergers,” says=20 Daniel Quirici, chief executive of Deloitte & Touche’s=20 Corporate Finance (Europe) division and a specialist in=20 cross-border transactions.
However, while pressures on corporations to grow=20 internationally continue, the trend in cross-border=20 acquisitions seems to have reached its zenith. In addition,=20 there is increasing pressure on companies to keep their=20 local identities intact.
In essence, cross-border acquisitions have declined in both=20 number and value. Why?
Quirici outlines a number of reasons, including the high=20 real cost of money, low forecast growth rates and low=20 confidence shown by management and equity markets in the=20 combined companies after takeover.
* Many companies are still rationalising and integrating=20 acquisitions made in the past five years and are adopting=20 an extremely cautious attitude towards future acquisitions.
* Due to the volume of acquisitions in the 1980s there are=20 fewer opportunities left in local and international=20 markets. Quirici says that only one in four acquisitions=20 achieve pre-takeover targeted objectives and a high=20 proportion end up in failure.
* The time taken to negotiate deals has increased from an=20 average of six to nine months to more than a year. A longer=20 negotiation period increases the likelihood of a deal=20
Quirici says that it is likely that as the global recession=20 ends more companies will begin to stimulate activity in=20 equity markets.”
So, will local and cross-border acquisitions still take=20 place under these new conditions? Experts suggest that=20 directors who wish to undertake an acquisition, in whatever=20 form, will have to include cash in the consideration,=20 instead of only issuing new shares.=20
Another new trend identified by Deloitte & Touche is a=20 shift away from a small number of high-value targets to a=20 larger number of deals of lesser value. However, all deals=20 will have to include a high level of quality.
Moves by South African conglomerates to unbundle their=20 subsidiaries mean that medium-sized companies will become=20 the main players in the takeover arena.=20
Even if a company is big enough and has sufficient cash for=20 a successful takeover there could still be problems. For=20 instance, Coca-Cola cannot buy Cadbury Schweppes, nor=20 Nissan acquire General Motors. Even if there were no legal=20 impediments, there are organisational constraints such as =20 large management structures which would have to be merged.
With the rapid changes in technology, the key to success in=20 cross-border takeovers will be a company’s ability to make=20 fast decisions. “The increasing complexity and speed of the=20 information flow which links manufacturers, retailers and=20 consumers on a world-wide basis is such that the winners=20 are those who can create fast connections with potential=20 partners at the right time,” says Quirici.
A recently identified trend is for companies to co-operate,=20 instead of merging. The reason lies in the inability of=20 companies to buy assets which are difficult to price, such=20 as brands or research and development capacity.
One of the most important advantages of the new trends is=20 the potential for combining complementary skills and assets=20 while investing little cash.=20
In addition, partnerships provide a low-cost opportunity to=20 learn about the value of the skills and resources=20
At first glance, alliances offer an alternative to=20 acquisitions. But these ventures could be a strategic move=20 by entrepreneurs to allay takeover fears before launching=20 an attack.