Viewpoint: Charles Larbi-Odam
M&A can be an important tool to build scale, improve performance or remove excess industry capacity, and can fuel long-term, profitable growth. While not all M&A deals add value, failures should not necessarily discourage companies from pursuing them. Well-developed due diligence, valuation and integration capabilities can anchor an effective risk-mitigation strategy.
The need for growth in pharmaceuticals, banking, telecoms, oil and gas, mining and manufacturing are expected to drive M&A over the next decade. These sectors have accounted for the majority of M&A since the 1990s, partly driven by divestiture of public-owned entities. Robust, stable economic growth, increased scrutiny and regulations over banking, and pro-foreign investment policies can drive further activity.
Companies seeking to grow through M&A must create value by identifying and transacting strategic deals rather than reactively pursuing ad hoc opportunities. The increased minimum capital requirement for banks from GHS120m ($28.7m) to GHS400m ($95.8m) by end-2018 is projected to spark M&A. Although the recapitalisation is not expected to drive massive activity, players in the industry could take advantage of opportunities by following a structured approach.
First is self assessment: a company’s executive team members should assess its strengths, weaknesses and opportunities, in both revenue and value. This may include deciding which customer segments are most attractive, performing in ways that competitors cannot easily replicate, and understanding the capabilities and market access required to achieve those goals. Essentially, a company should develop a strategy to complement strengths and backfill weaknesses. Otherwise, companies will likely become reactive acquirers, working backwards from the deal into a strategy.
Second is identifying priority pathways: advantaged acquirers that have conducted careful assessments know their priorities. They have likely identified priority pathways at the business unit (BU) level that address new products or solutions they will bring to market at prices that will add value for customers. Corporate growth expectations can be de-averaged to the BU level and used to highlight gaps and prioritise M&A. Without that, a reactive political process – in which business executives choose their favourite deals rather than those in the best interest of the company – could occur.
Third is competitor signalling: it is important to look at competitors’ strategic intent. Much can be learned from their previous M&A in terms of geographies, capabilities, size, product or service offerings, and targeted customer segments. Past behaviour will often foreshadow future targets. Armed with that information, an advantaged acquirer can often determine whether to make a deal or prepare for a battle.
Fourth is strategic screening: once they identify opportunities, advantaged acquirers screen them. While strategies help develop prioritised pathways for growth, target screening filters portfolios of priority candidates. These filters may include size, geography and customer segments, or even technology and talent. Filters are important strategic choices that can help senior executives and the board understand why a particular priority target was identified in the first place.
Lastly comes disciplined execution: advantaged acquirers consider integration an essential element of target identification and prioritisation in transaction execution. For example, if there is potential for issues such as distribution gaps, compensation, autonomy or labour disputes on a deal, acquirers should factor that into the screening process. It can be difficult to analyse synergy potential or conduct a detailed valuation without evaluating such integration risks and determining if the right resources are available to integrate effectively.
M&A is a critical tool for growth and long-term shareholder value creation. Management teams wanting to engage in strategic dealmaking should build internal M&A capabilities and partnerships with experienced advisors to improve their chances of hitting a bullseye.
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