The pros and risks of M&As in Africa

EXPANSION TOOL: TAKING ON A FUNCTIONING BUSINESS MAY BE MORE EFFICIENT Make sure you conduct thorough due diligence on any potential partner.

Mergers and acquisitions (M&A) have been used as an expansion tool by companies for decades. It is regarded as a less risky method of expansion and one that provides a more plausible expectation on performance and future earnings based on historical data. This is unlike organic expansion, which entails opening a new branch in which theoretical projections have no basis.

In essence, merging and or acquiring a company is the process whereby a business buys a competitor or any other entity that can provide synergy for the purpose of expansion. It is a complex transaction of which an entire field of study has been developed to tackle its intricacies.

Nonetheless, there are advantages of M&A over organic expansion into Africa. Here are a few:

The assurance of income from the day you take over – which in itself is vital in operating a business on foreign land. Finding customers is never easy, especially in new territory, and what better way to mitigate the risk of no cash flow than to acquire a business that already has customers.

Planning: it’s difficult to plan in a market that you have little knowledge of. Many companies have gone under due to unexpected macro economics but, with an existing business that has a 10-year history you have data that allows you to anticipate and plan ahead.

Ready-skilled employees, systems and processes in place.

It saves you much time, because it takes a while to get a new branch off the ground especially on foreign land.

Clearly taking over a functioning and hopefully profitable business gives you less of a headache than starting from scratch.

But it’s not all smooth sailing – acquiring a business on foreign land has its challenges, for example, ownership structure. As in South Africa, many African countries require foreign companies to partner with locals to ensure native economic participation. Therefore, you will have to find a competent local business partner and that’s not all; there are legal processes you might have to go through such as the Competition Tribunal. Although the tribunal is only concerned with larger transactions that have significant impact on the market.

Then there is the acquisition cost. Due to you acquiring a profitable business with assets and customers, you are sure to pay an arm and a leg. If that’s not bad enough, buying a business also comes with buying its legal problems. Make sure you conduct thorough due diligence, otherwise you might inherit a legal case or taxes that will bring your acquisition tumbling down.