As the economy braces up for indigenisation and equity financing, many local investors are already warming up to acquire interests in certain companies, including take-over ambitions.
But the idea of raising indigenous business magnates is not a new phenomenon in the country for there have been quite a large number of indigenous transactions in the past. The most prominent deals included the acquisition by locals of Lobels, Blue Ribbons and Jaggers.
As expected and clearly documented in the history of mergers and acquisitions (M&As), nearly 60% of the deals fail, particularly mergers which involve the fusion of cultures.
While the idea of indigenising the economy by giving local investors the legal right to buy up to controlling interests in foreign companies has brought euphoria to those with the financial muscle to bulk up or build their empires, the failure of Jaggers provides a note of caution.
The M&A waters must be treaded on with care.
It is not unusual for a company or individual investor to jump off a sinking ship or find someone to hold a dying baby.
It is not in dispute that Cecil Muderede did not do a thorough due diligence in his acquisition of Jaggers. He probably was so overtaken by the idea of acquiring and controlling a big brand that he probably forgot to ask himself why the holding company Metcash was offloading the company.
A due diligence technically gives the potential acquirer the opportunity to investigate a target business by evaluating assets and liabilities to determine its net present value prior to signing a contract.
The scope of a due diligence should not be limited to material issues of the balance sheet; it can be expanded to cover macro-audits of contingent liabilities such as market conditions, the future of an industry, political risk and others. Rarely do acquirers relate macro-risks to an acquisition.
No doubt, Jaggers’ liabilities did not arise after its take-over by Muderede. The company was already struggling and edging towards insolvency at the time the sale and purchase agreement was sealed.
Muderede too did not consider the contingent liabilities locked up in employment contracts yet the costs of retrenchment can even drag a company into liquidation.
The lesson from these mistakes is basically that local investors should not get head over heels about mere M&A opportunities.
While the risk is minimal for indigenisation-induced transactions, those offered to head off the viability crisis triggered by dollarisation are a big risk.
The disposers may be tempted to conceal liabilities in order to maximise benefits. But non-disclosure of information can be detected if a due diligence is properly done.
Technically, the process should cover nine audits, namely the compatibility audit, financial audit, macro-environment audit, legal/environmental audit, marketing audit, production audit, management audit, information systems audit and reconciliation audit.
It is a grievous mistake to have any one of these taking precedence over the other; they are all equally important.