Consider Mergers and Acquisitions as a growth strategy

Almost a year after Covid-19 started to disrupt our lives and with the turmoil that the second wave of infections is causing, it is difficult to base any growth plans on the overall expected GDP growth.

However, given the contraction in the economy we experienced in 2020, growth must be a theme for 2021. An important lever for growth has resulted from the pandemic’s impact: in April 2020 the Competition Commission indicated that it anticipated a surge in mergers and acquisitions after the pandemic had taken its course.

This is a global expectation, with analysts suggesting that the pandemic-generated financial crisis will create so-called alpha companies: large, mature and cash-flush companies in a strong position to buy out their competitors.

There are still significant headwinds awaiting many businesses, especially those less able to adapt to the new normal, which creates opportunities for these alpha companies to step in and target businesses that find themselves severely impacted by the pandemic fallout.

Add to this scenario unfavourable gearing further diminishing a balance sheet, and the weaker companies become prime targets for competitors to drive growth.

It’s important, however, to carefully consider the type of industry in which the target company operates, the risks and opportunities presented through this pandemic and the nuances of the South African economy, as these are pivotal to the decision to proceed and the structuring of a transaction.

Considering the synergies – such as cost, technology and culture – between the two companies is imperative: they must be clearly identified and distinctly linked to balance sheet and income statement benefits.

It is also important to have a clear understanding of how the transaction will change or augment the acquiring company’s position in its value chain, as well as any contingent liabilities and risks embedded in the transaction.