Mergers And Acquisitions In Zim: Investor Beware!

ZIMBABWE’S corporate history is awash with stories involving failed corporate transactions that were trumpeted as ground breaking strategic initiatives by their sponsors.

 

Many of the failed corporate transactions, particularly those involving mergers and acquisitions, have generally pointed to inadequate information exchange between the transacting parties characterised by non disclosures and deliberate concealment of vital information that would have been deemed to be harmful to the interest of one party to the transaction, the seller, but nonetheless critical to the decision making process of the other party involved in the transaction, the investor.

Yet a well planned information gathering and analysis process by way of a due diligence review of the other party in the transaction may well reveal such non disclosures that could prove critical in deciding on whether to proceed with the transaction.

Ideally, a discerning investor should, at deal initiation stage, plan their business affairs in a manner that minimises the risk of deal failure. For this reason, certain classes of corporate transactions must invariably be preceded by a sound due diligence review of the other party.

A due diligence exercise is a process through which one party actively acquire knowledge of the other party to a corporate transaction, which knowledge can then be used in deciding on the merits of consummating a proposed transaction.

A sound due diligence review is imperative for all corporate transactions involving mergers and acquisitions and divestiture plans.

In a typical merger transaction, the due diligence effort is essentially a two way process were both parties to the transaction may conduct a due diligence review on each other.

Although it is not unusual for the target company to also seek knowledge by way of a due diligence review, it is however imperative that the investor undertakes a sound due diligence review of the target company. Thus, it is critical that investors take the necessary steps when engaging a seller in negotiating the acquisition of their business.

Given the implications of the results of a due diligence exercise on the overall transaction strategy, global practice has tended towards seeking expert advice from competent, suitably qualified and experienced professional consultants in performing the due diligence review in order to maximise on the benefits derived from a well executed process.

In Zimbabwe, it can be argued that a disproportionately high number of corporate mergers and acquisitions could not translate to improved corporate performance due to a number of reasons owing to a combination of poor acquisitions strategies, deal planning, execution and post implementation actions.

Although there is presently no formal study or empirical evidence to support the above assertion, a careful review of many corporate acquisitions in Zimbabwe that turned bad would generally reveal poor gathering of information of the target company with the (new) investor taking certain vital information provided by the vendor.

In such circumstances, no reasonable effort is made to form an independent professional opinion about the state of affairs of the target company.

In some cases, the legal documentation necessary to successfully consummate the transaction would either poorly be drafted giving insufficient safeguards by the vendor/seller of the business. A successful due diligence review may reveal critical information that may well be built into the transaction agreements as undertakings, warrantees or covenants.

Whilst the strategic expertise of management, their sound corporate vision as well as the vital strategic fit between the investing and the target companies are critical to the overall success in an acquisition transaction, history has shown that this alone is not enough.

How the acquisition is initiated, planned and implemented, including post deal implementation support actions is what often counts most. Thus, strategically planning how we are going to approach a corporate acquisition is one of the most important aspects of any successful corporate acquisition — and often, one that does not receive enough attention by prospective investors resulting in many deal failures.

Ideally, a corporate acquisition must be preceded by careful planning before, during and after the consummation of the transaction by both the investor and the target company.

Notwithstanding the obvious benefits of a due diligence review, many investors have either sought to avoid such a critical process often citing costs or time limitations.

A review of the numerous disputes that arises after the conclusion of a business acquisition shows that a sound due diligence review of the target company is a prerequisite if an investor is to acquire sufficient and appropriate knowledge of the acquisition target, and in the process safeguard their wealth from the potential adverse effects of a poor corporate transaction. lDisclaimer: Neither PricewaterhouseCoopers Zimbabwe nor any other member of the global PricewaterhouseCoopers organisations can accept any responsibility for loss occasioned to any person acting as a result of any material in this publication. For further information or comments please contact Marketing on marketing@zw.pwc.com or 338362-8.

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