Every now and then an opportunity comes along that looks very hard to resist. If you’re a seasoned entrepreneur, this might come in the form of a company that, although in such distress that the shareholders want out, still has genuinely valuable assets or a viable business model.

Contrary to what many people may believe, mergers and acquisitions are happening quite regularly across different industries, jurisdictions and business sizes in South Africa. Not all of the deals are made public or make big news, as it is usually only the ‘big name’ deals that tend to reach the mainstream media.

 

This is according to Isaac Chindotana, Lireas Portfolio Manager, who says, “Taking the insurance industry as an example, a number of mergers and acquisitions (M&A) have been happening and this has been seen across the entire insurance value chain: brokers, Underwriting Management Agencies (UMAs) and insurance companies. The past few years have seen more high profile M&A activity in the broker space, in some cases even extending to operations outside South Africa’s borders.”

 

He comments, “Most role players in the short-term insurance industry are faced with uncertainty, limited organic growth and various other challenges that may be partially absorbed or overcome through a merger or acquisition. Further to this, a number of players in the market are holding large amounts of excess capital that is available for deployment, further creating appetite for M&A activity.

 

“In the deals that Lireas Holdings – as a strategic investment company for Hannover Re Group Africa - has done with its partners over the years, we have observed some of the benefits and value unlocked out of merging or acquiring businesses. The current environment is therefore one that would encourage and in some cases necessitate mergers and acquisitions, rather than not.”

 

Chindotana says the UMA space, which provides specialised insurance products and services to brokers within specific lines of business, has also been quietly active in the past few years, although with less prominence than the larger brokers and insurers. “As a strategic investment company for Hannover Re Group Africa, Lireas Holdings has been involved in a number of very successful merger and acquisition deals involving UMAs, especially over the past five to 10 years. When businesses come together, it is usually as a result of voluntary and strategic moves to achieve certain business objectives.

 

“However, it is also not uncommon for businesses to approach a suitable buyer of their business as a way to ensure their survival when faced with challenges. At the extreme end of the M&A activity spectrum, we also find businesses that have been acquired against their will in hostile takeovers.”

 

Chindotana says that, disregarding the risks or potential downside associated with mergers and acquisitions, the potential benefits or drivers for such deals are generally as follows:

• Synergies – The potential efficiency gains achieved through sharing resources across products and increasing profit margins in the combined entity can create a major attraction for consolidation. 
• Growth – Mergers and acquisitions also help to improve operating scales, access to other markets, distribution channels, niche lines of business and customer bases. A number of players in the South African financial services arena have acquired businesses in lucrative emerging markets where these businesses are expected to grow faster than South Africa in coming years.
• Diversification or sharpening business focus – Some organisations may choose to acquire another company in an unrelated industry to protect themselves from any downturns in their core industry’s performance. On the other hand, organisations seeking to sharpen focus often merge or acquire companies that have a deeper market penetration in a key area of their operations.
• Response to a competitive and/or changing landscape – Organisations are sometimes better off combining forces to meet challenges that they would struggle with separately. The increasing compliance and regulatory requirements in the financial services space would encourage consolidation.
• Supply chain control (vertical combinations) – As a strategic move, a business may choose to buy one of its suppliers or distributors to achieve cost savings in its business or more closely control the chain. For example, in jurisdictions which allow this, some insurance companies have bought into brokerages in order to have control over product distribution channels.
• Management of competition – M&A deals are sometimes specifically carried out to eliminate future competition or gain control of a competitor’s potential business advantage.

In recent years across the globe there has been a substantial amount of consolidation spanning various industries, from multiple acquisitions by Google and consolidation of manufacturing in many areas to the recent local buyout of Avusa by the Times Media Group. Mergers and acquisitions are typically driven by opportunities to increase revenue, for example cross selling into each customer base, or to increase operational efficiency by leveraging economies of scale in the new, larger business. However when it comes to the actual integration of two disparate companies, organisations often focus exclusively on the commercial perspective, attempting to leverage synergies between the businesses while other areas such as data are left by the wayside. The reality though is that data is a critical component in the success of any merger or acquisition, and a comprehensive data strategy it vital in ensuring a smooth transition and expedient realisation of business goals.

There are many high-level considerations to take into account, and any acquisition is fraught with complexities. Consolidation in any market is typically as a result of a need to remain agile and competitive. However, without data integration, a sound data strategy and data quality initiatives, this agility is difficult to achieve. This is particularly true in a situation where a company either buys out another or attempts to merge two separate entities. Whenever a merger or acquisition takes place, business objectives need to shift and data needs to support these business objectives.

The challenge lies in integrating data from the two entities, as if this cannot be successfully achieved data within the new merged entity will be incomplete or inconsistent, leading to compromised business decision-making, potential non-compliance with data legislation and even degraded customer service levels. In order to ensure the success of mergers and acquisitions, it is imperative to define frameworks and methodologies around data, linked to the business goals of the organisation.

From a data perspective, the challenges around integration are the same for any organisation, regardless of industry or vertical sector. Companies often have vastly different business processes, as well as different financial and legal constraints and different data management practices. If data quality is poor it can have negative implications for the newly merged organisation, and this needs to be addressed. The integration of the business data from the acquired company needs to take into account the legal and financial constraints of the acquirer, and must also incorporate the acquiring business’ best practices, data standards and business rules. This helps to ensure that data quality is maintained before, during and after the integration, to guarantee business continuity and to reduce business risk.

Data integration is often forgotten in the process of a merger or an acquisition, as a result of the ever-present disconnect between business and IT. Often, business will assume that this is IT’s problem, and IT will think that this should be a part of the business side of the acquisition. This means that frequently data conversion and integration is an afterthought and is not handled effectively, which can have significant consequences for a business. For example, if payment data is inaccurate, payments can be delayed, the data must be reworked which takes time and costs money, and organisations can end up in bad debt situations. If data is incomplete, financial reporting will be inaccurate which has several consequences of its own, including legal implications.

In order to address these issues, key business rules need to be identified and applied to avoid business impact during data conversion. Data integration is critical to the success of a merger or acquisition. If the data is not consistent with or does not support the business rules, it becomes increasingly difficult for an organisation to meet and achieve the business case of an acquisition in a timely fashion. A data excellence framework, which encompasses common processes, best practices and common methodology around data quality, data integration and data governance, provides a step-by-step approach to the integration of data to enable acquiring companies to fully leverage on the expected value of an acquisition.

The business-driven rules of a data excellence framework ensure the successful and effective integration of data by providing data quality metrics, exception management and thresholds for data quality after integration to enable smooth future operations. Business rules are defined as rules which data must comply with in order to execute business processes, addressing areas including accuracy, completeness, consistency, duplication and obsolescence. The data excellence framework also ensures that a practical approach to data is taken that does not unduly delay matters, by focusing on critical business rules. For example, rather than seeking 100% quality, which may not be achievable given the acquisition timelines, the optimal data quality level can be determined and targeted to balance integration, quality, governance and given time frames.

Key components of such a framework include data management processes which are interlinked with business, standardised data structures, defined best practices, a standardised data integration platform, and increased levels of ownerships and best practices in business functions. It offers a toolkit for managing change, particularly related to data, within an organisation.

A core function of the data excellence framework is to provide a simple, straightforward process governing data quality business rules as well as to link data quality objectives to their impact on business, to ensure that data integration initiatives can be prioritised accordingly. The framework also defines roles needed for effective data governance and accountability, and enables the execution of multiple data integration projects in the same timescale.

Ultimately the success of the business aspect of mergers and acquisitions relies on the successful integration of data. A detailed data excellence framework and best practices along with a data governance model that includes both business and IT are critical in ensuring this success. In today’s data driven environment, business strategy can only succeed if it is supported by data, which means that high quality data is vital to a merged or acquiring organisation’s sustainability and growth. Data is a business asset, and particularly in the case of mergers and acquisitions should be treated as such.

South Africa's strong food and beverage (F&B) sector is a vital area for increased activity in mergers and acquisitions (M&A) with further consolidation expected in this sector, particularly due to food scarcity concerns.

According to Grant Thornton's International Business Report (IBR) on the F&B sector, local producers are hoping to vertically integrate their supply chains from grower to final consumer in order to overcome the projected scarcity concerns projected for the future and remain competitive. The report reveals that producers are optimistic about potential M&A opportunities in the year ahead.

"Much like global giant Walmart showing interest in South Africa's Massmart, we're expecting more activity of this nature in the next few years." says Steven Kilfoil, Corporate Finance director at Grant Thornton Johannesburg. "The F&B sector provides great opportunity for consolidation and the African continent is brimming with possibilities for those looking at new growth avenues."

The recent IBR on M&A activity which was released in May 2012 supports this view. "According to this report, 46% of South African businesses looking to expand through acquisitions over the next three years expect to do so through cross-border transactions."

Kilfoil adds that the F&B sector has seen strong growth in the past few years. "It has proved itself to be very resilient and defensive in the recent turbulent economic period, as consumers continued to support this sector, both in the value and upmarket categories."

According to the IBR on F&B, 20% of businesses in this sector globally are investigating M&A opportunities as this will help deliver scale for greater efficiencies and more muscle when negotiating prices with retailers.

Kilfoil says it is evident from the report that South African F&B producers are already gaining market share. "A number of them are already making use of the opportunities on the rest of the continent and gaining market share in other African countries."

One reason why the African continent is so attractive for F&B activity is the fact that its agricultural sector provides plenty of opportunities for investment.

"We are positive about increased M&A activity in the F&B sector as the conditions seem ripe for investors looking to expand," he concludes.