Merger & Acquisitions: Why they fail?

15 April 2024 ,  Mark le Riche 427
Mergers and Acquisitions (M&A) are intricate commercial transactions that hold huge potential for economic growth, investment, job creation and increased market competitiveness. Yet, their complexity can also be their undoing. In this article, we take a look at some of the main pitfalls and issues in South Africa that result in unsuccessful M&As or M&As that don’t live up to their expectations.

Socio-political factors
The South African economic and corporate environment is significantly shaped and affected by a myriad of socio-political factors. These factors also impact M&A transactions. Obvious examples include the complex South African labour environment as well as encompassing BEE requirements and transformation goals, which are major factors that must be considered in an M&A transaction in this country. Yet, when these issues are not adequately canvassed, managed or even overlooked by parties they can turn on the transaction and cause havoc.

Even from a competition law perspective, socio-political factors can play a huge role in the approval and eventual success of an M&A transaction. The South African competition law is unique in that it requires consideration not only of whether a proposed M&A prevents or lessens competition in the market but also if “the merger can or cannot be justified on substantial public interest grounds" as stated in Section 12A of the Competition Act 89 of 1998 (“Act”). These public interest provisions are a key component of the consideration of an M&A by the Competition Commission and should also form a key part of the submission for approval, or, be ignored at the party’s peril.

Regulatory bodies
The South African regulatory landscape, as with other jurisdictions, presents a complex landscape to navigate for a successful M&A transaction. A number of key regulatory bodies such as the Competition Commission, Takeover Regulation Panel, B-BBEE Commission etc. all have their own set of rules and requirements with which M&As must comply. These requirements as well as the nuances of preparing and submitting applications for consideration are vital to not only the approval of an M&A but also its successful implementation. 

It should also be noted that the Act affords the Competition Commission and the Competition Tribunal the ability to rescind any of the decisions made by the regulatory body in approving an M&A transaction. According to Section 15 of the Act, any such rescission may result if the following reasons are present:

1. False information provided by a party to the M&A transaction;
2. if the approval obtained was deceitful; or
3. if either the target or acquiring firm involved in the merger breaches an obligation attached to the decision.

Likewise, Section 16 of the Act provides that should the Competition Commission approve either an intermediate and small M&A and which are subject to any explicit provisions or conditions, any party to the M&A may request the Competition Tribunal to evaluate these provisions or conditions of said M&A. 

Any failure to therefore have an M&A approved or to meet the conditions of an M&A could accordingly be highly prejudicial to the success of an M&A transaction.

Due diligence
Whether it be financial, legal, commercial or other technical due diligence aspects, a comprehensive and thorough due diligence process is an integral part of any M&A. The due diligence process enables the acquiring and target company to identify risks and issues which can be planned for or which may present a hurdle to the continuation of the transaction. The more thorough the due diligence, the better the risks are understood by all and unforeseen surprises avoided. According to Bain’s 2020 Global Corporate M&A Report, the major cause for failed M&As is a result of poor due diligence.

A successful M&A therefore demands comprehensive due diligence that allows the transaction to be structured properly and concomitant risks aired and addressed. The more surprises that pop out later the higher the risk of the M&A transaction failing or not meeting the expectations of the parties.

There are many other factors that can cause an M&A to flounder ranging from management issues, market reaction, unforeseen global events like Covid-19 and more. However, ignoring any of the above aspects will undoubtedly contribute towards a poorly planned and structured M&A, which runs the risk of not being approved by regulatory authorities and becoming a potential pandora’s box for unforeseen risks and issues. 

For guidance or assistance with your M&A transaction planning, due diligence or implementation, feel free to make contact with our M&A Team who can help establish the correct approach for your transaction. 

Visit our M&A Team page


Disclaimer: This article is the personal opinion/view of the author(s) and is not necessarily that of the firm. The content is provided for information only and should not be seen as an exact or complete exposition of the law. Accordingly, no reliance should be placed on the content for any reason whatsoever and no action should be taken on the basis thereof unless its application and accuracy have been confirmed by a legal advisor. The firm and author(s) cannot be held liable for any prejudice or damage resulting from action taken on the basis of this content without further written confirmation by the author(s).
 
Related Sectors: Mergers & Acquisitions
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