Mergers & Acquisitions (M&As) (Executive Summary) CGF Research Institute (Pty) Ltd Reg. No. 2004/000744/07 + 27 11 476 8264 / 1 / 0 + 27 82 373 2249 tbooysen@cgf.co.za www.cgf.co.za www.corporate-governance.co.za www.governanceconnect.mobi Twitter: @CGFResearch In today s dynamic marketplace, M&A transactions require a heightened level of commitment, creativity and responsiveness. Competition is intense, and such factors as earnings pressure, market convergence, widespread deregulation and unprecedented technological innovation continue to transform the global economic landscape. Deloitte
Executive Summary: Mergers & Acquisitions Mergers and acquisitions (M&As) are a critical part of the fabric of doing business in a free market economy. Business combinations are an integral part of a global business community. Mergers, Acquisitions and Other Restructuring Activities (Preface to the Fourth Edition) Donald M. DePamphilis
M&A transactions generally occur by way of a scheme of arrangement, or a takeover offer, or by purchasing the assets of a company... Mergers: Definition & introduction Various terms are associated to a M&A transaction, which include: corporate restructuring, acquisition divestiture or spin-off, unbundling, equity carve-out, management buyout, takeovers, friendly / hostile takeover & joint venture The most common types of merger transactions include the sale or acquisition of assets or shares in a company & the amalgamation of two or more companies a merger is deemed to occur when direct or indirect control is attained by a firm over the whole or part of the business of another firm - the Competition Act (Section 12(2)) lists examples of control Mergers, involving the transfer of control of businesses, are likely to have an affect on market structures & competition within the relevant market given the difficulties for competition authorities to change market structures once they have been established, it is essential that mergers are supervised by competition authorities through merger law, competition authorities manage & supervise mergers in order to prevent the creation of anti-competitive market structures in South Africa, mergers are regulated in accordance with Chapter 3 of the Competition Act which requires amongst other, the approval from the competition authorities, for all mergers that exceed certain prescribed asset & turnover thresholds, prior to their implementation
... the Competition Act distinguishes between small, intermediate & large mergers. Intermediate & large mergers require approval prior to implementation Mergers: Thresholds The Competition Act distinguishes between small, intermediate & large mergers for notification & adjudication purposes there are 2 basic thresholds, both of which must be exceeded if a merger requires notification & prior approval: (1) target threshold - focuses solely on the South African ( SA ) turnover & SA asset value of the company or business being sold (2) combined threshold - focuses on any combination of the SA turnover or SA asset value of the target group, on the one hand, and the SA turnover or SA asset value of the buyer, its direct or indirect controlling firms & all firms controlled by the buyer & such controlling firms, on the other hand 1. A small merger is defined as: one where the merging entities have a combined annual turnover or combined assets in, into or from the Republic of SA of less than R560 million & where the target company s annual turnover or assets in, into, or from the Republic is less than R80 million parties to a small merger are not required to notify the Competition Commission of the merger & may implement the merger without the Commission s approval 2. An intermediate merger is defined as: one where the merging entities have a combined annual turnover or combined assets in, into or from the Republic of SA equal to or exceeding R560 million & where the target company s annual turnover or assets in, into, or from the Republic is equal to or exceeds R80 million parties to an intermediate merger are required to notify the Competition Commission of the merger & it may not be implemented until it has been approved by the Commission 3. A large merger is defined as: one where the merging entities have a combined annual turnover or combined assets in, into or from the Republic of SA equal to or exceeding R6,6 billion & where the target company s annual turnover or assets in, into, or from the Republic is equal to or exceeds R190 million parties to a large merger are required to notify the Competition Commission of the merger & it may not be implemented until it has been approved by the Competition Tribunal
The existing Companies Act of 1973, as well as the new Companies Act 2008 provide extensive coverage regarding mergers in South Africa Obtaining control of a company: Companies Act of 1973 Until such time as the new Companies Act of 2008 comes into effect, the Companies Act of 1973 governs mergers in South Africa There are 3 ways of obtaining control of a public company in terms of the South African Companies Act No. 61 of 1973 (Companies Act)): 1. Scheme of arrangement (Section 311, Companies Act,1973) 2. Takeover offer (Section 440A - 440N, Companies Act,1973) 3. Sale of business (Section 228, Companies Act,1973) Mergers: Companies Act of 2008 The requirements pertaining mergers & amalgamations are clearly set out in Section 113 of the Companies Act of 2008. The Act contemplates: the formation of one or more new companies, which together hold all the assets & liabilities that were held by any of the amalgamating or merging companies immediately before implementation of the merger agreement, & the dissolution of each of the amalgamating or merging companies OR the survival of at least one of the amalgamating or merging companies, with or without the formation of one or more new company, and the vesting in the surviving company or companies, together with the new company, of all the assets & liabilities that were held by any of the amalgamating or merging companies immediately before the implementation of the merger or amalgamation agreement In the new act, mergers & amalgamations are considered fundamental transactions & they must comply with certain basic requirements (Sections 112-115)
There are various considerations that firms should take into account when embarking upon a merger transaction Mergers: Some considerations for firms entering merger discussions Firms involved in a transaction which may result in the conclusion of a merger, should consider the following: Is the transaction a merger as defined in the Act [The Competition Act No.89 of 1998]? If the transaction is a merger, what type of merger is it? Will the merger need to be notified to the Competition Commission? If the merger must be notified to the Commission, how must this be done? Who will adjudicate the merger? According to what criteria are mergers adjudicated? What decisions may the competition authorities make? Are decisions taken by the Tribunal or Commission final? The success of an acquisition is frequently dependent on the focus, understanding, and discipline inherent in a thorough business plan. There are four overarching questions that must be addressed in developing a viable business plan. These include the following: 1. Where should the firm compete? 2. How should the firm compete? 3. How can the firm satisfy customer needs better than the competition? 4. Why is the chosen strategy preferable to other reasonable options? Donald M. DePamphilis Mergers, Acquisitions, and Other Restructuring Activities Source: Competition Law of South Africa. By: Philip Sutherland & Katharine Kemp (Adapted)
In order for the M&A process to be effective, the different stages should be managed concurrently by a single large team that effectively communicates with each other & with the rest of the organisation Stages of the M&A process The M&A process may be divided into 4 basic stages, namely: 1. A pre-deal business case 2. Strategic due diligence 3. Planning the post-merger integration 4. Executing successful integration Merger & acquisition failures are not uncommon & these failures often cause harm to the companies, tarnish their credibility in the market, & undermine the confidence of their shareholders. Some reasons for M&A failures include: inadequate due diligence lack of understanding of the value proposition inadequate planning poor or ill-matched strategic fit not addressing the softer issues such as organisational leadership, culture & fit inadequate integration processes (rather than a failure in the business operations themselves) insufficient attention paid to ensuring the success of the deal after it has been concluded over-payment for target companies
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