The driving factors for M&A transactions

Multiple factors drive the decision to enter into an M&A transaction and once a decision is made, the next phase is to consider how the M&A transaction will be financed. If done properly, M&A transactions are usually expensive because several players are involved pre-, during, and post-the M&A transaction aside from the consideration payable to the other party. In this article, we explore the driving factors for M&A transactions.

Accelerate growth, market expansion and diversification

Companies looking to expand into a new sector, business, market, or jurisdiction find M&A as the ideal option to achieve the intended objectives and outcomes. M&A is a suitable route if the M&A parties are aligned on how they will cooperate if it’s M&A leading to a joint venture (JV) and if it leads to a complete exit by the previous owner, gradually handing over the operations with post-M&A support can lead to attaining the desired outcomes. Research should focus not only on the acquisition semantics but the suitability of the target/acquirer to operate in the specified jurisdiction, business, and market and possess the know-how to maintain a successful venture. At times M&A can be too driven by expansion and diversification pressure from senior management/shareholders and landing in a wrong deal with a wrong party which can backfire and lead to significant losses.

Economic factors: capital injection, expanding customer base, cost-saving

The above, to mention a few are the critical economic factors driving the parties to enter into an M&A transaction. The selling party may be looking for additional finance to manage its operations and expand production or venture into a new line of business, on the other hand, the acquiring entity may be looking to expand its customer base by acquiring a stake. Whatever the reasons influencing the decisions of the acquirer, target, and seller to an M&A deal, the preferred outcome should be aligned so that both parties can achieve the desired target following completion. Whilst M&A transactions leading to a total exit of the seller may be easier since the acquirer is let exclusively manage the operations, the JV option may be better because the experienced party who has customers’ trust will remain in the business although there may be internal clashes. It is not often that there is a discussion at the onset on why the merging parties are desiring the M&A transaction and this may lead to challenges later especially if the seller was selling unwillingly e.g. due to financial hardships rather than a willingness to partially or fully exit the business. If both parties are aligned and attain the desired outcomes, it will eliminate the risk of the deal collapsing or sabotage post-closing.

Divesting of non-performing assets

This may fall as an economic factor mainly because it involves offloading non-performing assets and the line of business which no longer fits within the vision of the target. Alternatively, the target may wish to partner with a third party for the particular line of business and the JV arrangement provides that the target brings in the assets, business portfolio, and employees, and the third party invests in hard cash. Sometimes this type of M&A is brought about as tax planning that the specific line of business and its assets have to be moved to a new entity. No matter the reasons or how it is implemented, the outcome is an M&A transaction and it will be scrutinised from an M&A perspective especially if there is a third-party investment.

Pressure to exit

This is common in private equity firms. They enter the market and usually have a foreseeable plan to exit the market, cash in the returns, and distribute profits to their investors. Due to timeline pressure, they are usually eager to enter into M&A transactions to allow them to exit the project and cash in on the profits ready for distribution or re-investment. Depending on several factors including the jurisdiction, nature of the business, its track record, and profitability, it can take a considerable time for completion to occur and allow the exit.

Legal requirements

Some M&A transactions are driven by legal requirements that arise from changes of law which require existing businesses to restructure. The common trend in African countries is localisation which requires a portion of equity to be held by citizens, entities where citizens are the majority, or the Government. All this leads to mandatory restructuring through M&A transactions. Alternatively, it can be through imposing a mandatory requirement that entities undertaking a specified business or hold a particular licence list in a stock exchange. Usually, such restructurings happen out of an obligation under the law rather than the willingness of the business owners to have an M&A and it can lead to disruption in operations and unsettling challenges which can collapse the business.

Whatever the reasons driving the M&A transaction, the acquirer, seller, and target must be aligned on why the M&A transaction is occurring and post-closing support is critical to ensure the continuation of business. The M&A parties need to understand that there is a fourth player that must be considered i.e. the employees. They derive their livelihood from the business operations and although the employees are not always considered or are the driving factor in the M&A transaction, their involvement is critical in the profitability and operations of the target.