/ 26 October 2018

Mergers and acquisitions in a tough economic time

Mergers and acquisitions are directly affected by business confidence
Mergers and acquisitions are directly affected by business confidence, which is influenced by, among many other things, who is the president of the country

It seems an unlikely time to be in the business of buying corporations or making any significant investment in a long-term change to corporate structure; as warnings abound of tough times for companies and individuals alike in South Africa, most are focusing on tightening their belts. For the mergers and acquisitions market, however, it’s an interesting time: there are opportunities to be taken, and smart investors can find ways of making current conditions work to their advantage.

What mergers are made of

Although the two words tend to be found grouped tightly together, most individuals with some business knowledge are aware of the difference between the two: a merger is the joining of two corporate entities, while an acquisition is the takeover of one company by another. From here, the concept of a merger splits into numerous types: the formation of a conglomerate, in which companies from unrelated industries join up for the sake of their shared stability and success, and to provide an enticingly diverse offering to investors, is one of these.

A horizontal merger is one in which two companies in the same industry find that synergy would serve their mutual interests better than competition and join forces accordingly; a vertical merger is where a company merges with another enterprise that previously formed part of its supply chain.

So, how does a successful merger take place? With a lot of help from outside parties, for starters: you’d be wrong to think that there are just two parties involved in the process. There are skilled legal teams specialising in just this kind of law that help create smooth-running transactions and thriving companies thereafter.

“Legal professionals, along with other professional advisors, play a crucial role in a smooth execution of the merger process generally,” explains Jacqueline Yeats, associate professor at the University of Cape Town’s department of commercial law. “Ideally they should be involved right from the outset in the planning stages, and should remain on board until the implementation of the merger has been finalised. Legal expertise in a merger is essential to structure a transaction in the most efficient way possible, to make sure all regulatory requirements are met, to assist with negotiations and drafting and to advise the company on any ancillary legal issues or legal obstacles which may (and almost always do) arise unexpectedly during the course of the transaction.”

It’s the facilitation provided by these legal professionals that allows for a successful transaction — preventing the merger from falling apart, in other words — but legal involvement is also required to set up the company for longstanding success.

Yeats says: “The importance of the implementation phase of a merger, which usually takes place after all the commercial dust has settled, is often underestimated. It is vital that the legal professionals remain involved at this post-merger stage to ensure that all facets of the transaction are properly finalised and that there are no loose ends which may present problems for the merged entity in the future.”

A good time to team up?

In the first half of 2018, concerns surrounding state capture and related corruption saw an overall decline in both cross-border and domestic acquisitions, in terms of value as well as volume.

The effect of the new presidency on the mergers and acquisitions market is likely to be twofold: firstly, if confidence in the presidency continues or increases, international investment is likely to grow. Secondly, the stark effects of increased taxes are likely to be felt by many small companies, perhaps to the point that business is no longer feasible for them. Businesses struggling to hold their own financially might turn to the option of cutting their losses by selling to an investor — creating something of a buyer’s market for larger companies that have the means to shop around and make acquisitions, even in tough economic times. Whether they’re seen as targets for takeovers or the lucky recipients of money when it’s needed most, many owners of struggling businesses agree gladly to being bought out.

“There’s strength in numbers” is a saying that oten rings true: mergers have been seen to spike just before a recession, as companies steel themselves and consider the protective or revitalising benefits that other businesses may offer them in a firmly cemented partnership.

A world of growth

Globally, the situation is very different: the beginning months of 2018 saw some of the highest collective values of mergers and acquisitions ever in international markets. In European Markets, a slightly more stable environment seems to be the reason for companies’ confidence in making these kinds of moves, while others have attributed the change simply to a more aggressive investment mood.

Both locally and internationally, recent years have provided interesting examples of mergers and acquisitions that have been essential steps in transforming companies looking to the future. Consider British American Tobacco’s acquisition of South African e-cigarette company Twisp: with a decline in smoking among millennial and Gen Z consumers, vaping seems a lucrative habit of which to take ownership, though time alone will tell whether e-cigarettes are a trend with longevity. The move was far from unique: internationally, tobacco companies such as Phillip Morris International and Imperial Tobacco have invested in similar products.

Perhaps one of the renowned acquisitions of recent years has been Facebook’s takeover of Instagram, and the company’s seemingly shameless adaptation of their digital product to take on rival image-sharing channel Snapchat. Getting ahead, it seems, has less to do with what you know than who you know is open to selling, sharing, or shifting shape.