Why do African Targets M&A deals fail?

M&A involves two or more companies merging into one company or multiple subsidiaries with a single owner. M&A deals involve legal, financial, and commercial due diligences focused on an in-depth historical review of the target company(ies) where faults and concerns are identified for the benefit of the acquirer to make an informed decision on the merger.

The M&A experts play a partial role in keeping the acquiring entity informed on the target’s operations and risks but the acquiring entity needs to focus on what happens post-closing and overall operations of the target(s) post-merger. Closing is a small part of the long-term operations and business activities of the merged entities and multiple factors come into play on closing and post-closing which can lead to merger failure leading to reversal, which can be costly and adversarial. What causes M&A deal to fail?

Non-involvement of the owner, management, and employees of the target entity(ies)

Usually due diligence is undertaken by third-party external advisers who require information and the target entity supplies the information to the extent available. It can be challenging to ascertain the opinions of the owner, management, and employees of the target entity regarding the acquisition if they are not actively engaged in the process. The target may be highly performing, profitable, and with a promising future but all that should be credited to the individuals managing the target’s operations. Excluding their involvement will eventually lead to sabotage of the target’s operations either by resignations, quiet quitting, bad-mouthing the target to customers, etc. The results of such sabotage will be seen post-closing where the target’s operations start to suffer. Whilst there are risks of disclosing potential acquisition during the due diligence phase especially if the acquisition does not occur, it is advisable to include the management and employees once a decision to proceed with transaction documents is made because by then it will already be public information within the target of the impending acquisition.

Cultural issues and poor integration process

Africa-based businesses, especially if their historical owners are Africans, have strong hidden cultural elements involved. Employees of such entities may be loyal to the owners not out of employment obligations but on personal respect and relationships i.e. who the business owner is to that employee and there can be cultural/tribal/family relationships/links. Overall Africa has a strong cultural influence and incidences of getting and remaining employed in an entity are linked to word of mouth and family ties. Also, customers are influenced based on the personal relationship they have with the owner and/or senior employees of the respective entity. An outside investor may undertake a successful merger with the local African entity but encounter resistance mainly because of the cultural issues that link the employees and management to the previous owner. Forcing integration, including imposing sophisticated structures, policies, and IT systems may not receive a positive response leading to quiet or expressive resistance which may bring the target’s business to a complete failure. Pre-engagement with management and owner to ensure a successful merger post-closing remains critical because, in the post-closing phase, due diligence reports and transaction documents will not assist when employees are sabotaging the target’s operations.

Redundancy and replacements of employees

It is common that post-merger, some employees may be terminated from their positions and there can be replacement hires particularly at the managerial level. As stated above, specifically from an African context, this has to be handled delicately with the involvement of the owner and the relevant managers and information trickling down to other employees. Managers may have links to employees based on their personal relationships meaning the staying and performance of employees is linked to their relationship with their managers. If the manager is forced to resign and that position is taken by a foreigner who has no experience in African context, particularly the country where the entity is operating, there will be a clash meaning the new manager will fail to manage employees and employees will gang up against the manager leading to failure in the overall operations of the target. During the due diligence phase, the investor and the owner must have clear discussions on the senior management personnel and redundancy that may occur as part of the merger, and steps to implement such redundancy must be completed as part of closing initiatives so that the owner is involved in the process. New managers must receive training on integration and cultural biases to equip them for their new role whilst respecting the cultural needs of those employees.

Planning for the unknown

Notwithstanding the engagement and involvement of highly paid advisers during the M&A process, there are always surprises after closing, big or small. Whilst some risks and challenges can be foreseen following an exhaustive due diligence process and involvement of management and employees during the initial phases of the acquisition process, there are remote and unforeseen risks that come to the surface months or sometimes years after closing. For example, there can be change in the regulatory framework, market shifts, political influences, etc. These factors must be discussed and negotiated during the transaction documents phase on how the parties will deal with such a situation. It is important to have an additional budget set aside to handle these issues and clear arrangements by the parties for how these will be dealt with particularly if the merger is to be undertaken in phases with significant time lapse between the phases.

Joint venture arrangements

Some mergers involve co-ownership with the existing owner(s) of the target entity e.g. the merger involves the current owner(s) being issued with equity at the parent acquiring entity. Co-ownership can lead to clashes which eventually force the parties to re-negotiate a complete exit by the previous owner(s) or reversal of the merger to their original positions. Usually, such failure follows pro-longed disputes which can be costly and may lead to poor performance of the respective entities in the process.  Back-up plans are necessary on both sides to minimize losses and sour relationships following merger failures.

Buyer’s or seller’s remorse

It may happen that either the buyer or the seller is having second thoughts on the merger. There are multiple reasons which may trigger buyer’s remorse but the key ones are over paying or false information/misrepresentation by the seller. If the buyer feels that he/she was cheated by the seller and there is discrepancy on the information which the buyer relied on, it may trigger the buyer wanting to terminate the merger either by stepping away before closing or reversing the transaction after closing. On the other side, the seller may want to reverse the acquisition because of various factors but mainly feeling they are not getting a fair deal, lack of trust on the buyer to retain all employees, realizing the buyer is purchasing to wind up the operations of the target to pave way for competition by ending target’s brand, etc. Regardless of the factors behind it, the parties need to plan for the possibility of either of the parties wanting to step back and not proceed with the merger or reversing the merger and penalties, if any to be imposed.

If you have any questions about the topics discussed in this article, please contact Amalia Lui.