Insight

Mergers and acquisitions – maximising value

July 2020


There are many good reasons for corporate mergers and acquisitions (M&A), but they all have the same goal: to generate and maximise value for the shareholders. Here in Kenya, mergers and acquisitions have emerged into a growing practice. In fact, Kenya is the fourth most popular destination in Africa (behind South Africa, Nigeria and Ghana) for foreign investors looking to merge with local businesses.

Why mergers and acquisitions occur?

Two companies operating in the same business sector may come together (horizontal integration) in a search for economies of scale, new markets, alternative distribution channels, cross-border tax advantages or increased market share. Notable examples are Walt Disney’s acquisition of Pixar Studios and Facebook’s acquisition of Instagram. Alternatively, two companies in a supply chain may join up (vertical integration) to share technologies and achieve greater competitive advantage. An example might be a mobile phone manufacturer acquiring a supplier of electronic components.

There are several ways that value can be created for the business initiating the transaction. But the key is for value to be generated through the realisation of synergies between the parties to the deal. Such synergies may be operational or financial. A successful merger or acquisition requires a solid plan that will help to create those synergies.

Don’t underestimate the challenges

Regrettably, many M&A deals don’t deliver the anticipated synergies and value.

There are challenges associated with quantifying possible synergies at the planning stage, and then with achieving them during the post-transaction phase.

The greatest risks are:

  • unrealistic valuations
  • overstated estimations of potential synergies
  • insufficient financial and legal due diligence
  • regulatory matters
  • management and staffing issues
  • integration problems (culture clashes)
  • a failure to manage change
  • poor communication with stakeholders.

Careful planning is essential

So, what must be done to ensure that an M&A deal does, in fact, create the maximum value possible?

Selecting the right merger partner or takeover target is, of course, the primary concern. The strategic fit is crucial, so potential targets will have to be carefully assessed against the objectives of the move. It is essential to have a clear vision of those objectives and verify that targets have similar values and a corporate culture that aligns with your own.

Once a target has been identified, a thorough due diligence assessment must be performed. This will help to decide whether to proceed, how to structure the transaction and the financial aspects of the deal. Engage suitably qualified accountants and lawyers for this.

An M&A deal is a calculated risk. Due diligence will help to mitigate this risk and increase the chances of success. Depending upon the nature and size of the business and its geographic spread, the process could take several weeks or months.

In addition to an assessment of strategic fit, M&A due diligence activities would typically cover several key areas with respect to the target and the integration plans. A thorough SWOT analysis will reveal a lot but areas to focus on include:

  • structural issues such as ownership, management and staff
  • technology and intellectual property
  • market position, competitors and supply chain
  • financial data including cost assumptions, growth forecasts and tax obligations
  • asset ownership and valuation
  • legal, contractual, and regulatory matters
  • change management and communication
  • environmental issues such as audits, permits, licences, and insurance policies.

The most critical role in the due diligence process is a synergy evaluation. This means looking at areas where you can generate sustainable value and any changes you need to make to maximise this value.

Seek professional advice

When looking to grow and strengthen a business, a well-targeted merger or acquisition can be a successful way of achieving this. It can also be far quicker than trying to grow organically. However, the M&A process is complex and can take several months to complete; so, if you’re considering embarking on a merger or acquisition strategy, be sure to seek professional advice.

About the author

Lawrence Ngugi
Nairobi, Kenya

Laurence is a partner at Russell Bedford Alexander & Associates, the Kenyan member firm of Russell Bedford International. He heads the tax & regulatory services section of the practice.

Laurence is a qualified accountant and a member of the Institute of Certified Public Accountants of Kenya (ICPAK), since 2000. His areas of specialism include taxation, management consultancies, project management, forensic audit, valuations, combinations of corporate structures, mergers and demergers. He is well conversant in accounts, audit and law.

lawrence@russellbedford.ke 

Author: Lawrence Ngugi - Russell Bedford Alexander & Associates, Nairobi, Kenya