Unlocking synergies and seizing opportunities

Companies often face the choice of deciding to grow organically or through mergers and acquisitions (M&A). Although organic growth typically involves less risk, it takes longer; while growing by acquiring or merging businesses enables targeted and faster growth, but entails risk. While different approaches can be utilised for growth, this article focuses on M&A as part of a growth strategy.

M&A can be a powerful strategy for business growth, particularly for a company aiming to gain access to new customers, expand its geographic markets and/or advance its competitive edge. For instance, an acquirer may be looking to obtain a new product line, add more facilities, or gain expertise and intellectual property as part of its growth.

The example of Disney, through its acquisition of leading production companies like Pixar, Marvel, Lucasfilm and 20th Century Fox, over time, shows that a well-planned and executed M&A strategy can be highly effective in yielding business growth. Notable African examples include MTN Group, which has grown significantly through strategic acquisitions and mergers across Africa and the Middle East, and Shoprite, which has expanded its footprint across Africa through both organic growth and strategic acquisitions, becoming one of the largest grocery retailers on the continent.

A company embarking on M&A must be intentional and prepared, as bringing two businesses together – from conceptualisation and pre-deal engagements to valuation, execution and post-merger integration – is an enormous endeavour. Therefore, several factors, including those discussed below, must be considered for a successful acquisition or merger as a growth strategy.

During the pre-deal due diligence phase, it is crucial for the deal team to comprehend where synergies and integration opportunities exist within the businesses. Furthermore, the related complexities, timelines and costs to implement the transaction need to be understood to enable the business to make informed decisions during the deal approval process.

Leveraging synergies

Synergies are of the utmost importance when utilising M&A to generate growth. M&A, if initiated as part of a planned growth strategy, can result in synergies that offer value creation for both parties. From a cost-cutting perspective, parties could take advantage of overlapping operations or resources by consolidating them. But beyond this, effective strategic synergies can alter the competitive balance of power and create opportunities to change market dynamics in a company’s favour.

Companies can take advantage of revenue synergies, such as cross-selling products or services. In addition, when the products or services of the two companies complement each other, the merged entity can offer more comprehensive solutions to its customers. This was seen in Microsoft’s acquisition of LinkedIn, where the latter’s professional network complemented Microsoft’s suite of productivity tools. A notable African example includes Access Bank’s Acquisition of Diamond Bank in Nigeria, which combined Access Bank’s corporate banking strengths with Diamond Bank’s retail and digital banking capabilities. This acquisition enabled cross-selling of products to a broader, more diverse customer base, and accelerated digital adoption.

Beyond financial metrics, it must be considered how the acquisition aligns with the acquirer’s long-term growth strategy. When performing a valuation of the target, the acquirer needs to factor in synergies without overestimating their impact, while taking into account potential risks. Synergy projections should be based on a detailed understanding of both businesses’ operations. For instance, can the acquirer eliminate redundant functions without impacting service quality? Is there a real opportunity to cross-sell, or are the markets too different?

Opportunities for growth by filling in gaps

When the marketplace changes in response to external factors or regulatory development, it can create a gap in a company’s critical offerings. It may then be a prime opportunity for a company to engage in M&A to address such gaps and remain competitive in the market. For instance:

• a telecommunications provider might acquire a regional operator with a spectrum licence to fast-track its 5G rollout in key urban hubs;
• a company may react to shifts in consumer preferences. By way of example, an FMCG company may acquire a plant-based food manufacturer in response to an increasing demand for vegan products, while also benefiting from a lower carbon footprint compared to traditional meat-based offerings;
• new environmental regulations may require companies to adopt greener technologies. A company could address this by acquiring a business that owns the necessary technology, to enable it to be compliant; and
• changes in trade policies, such as tariffs or import restrictions, can necessitate strategic acquisitions to localise production.

Go big or go home?

On the contrary, smaller deals are often the sweet spot. It is not always a choice between going big or going home; in fact, smaller deals often have a higher likelihood of success due to several key factors. These deals often succeed because they are strategically focused, involve clear synergies, and are easier to integrate. They might also have reduced financial risk. The financial commitment in smaller deals is generally lower, reducing the overall financial risk for the acquiring company. As part of its growth strategy, a company may engage in small, strategic acquisitions to acquire innovative startups, enhancing its product offerings and remaining competitive without the risk and complexity of larger deals. However, even small-scale transactions are not a “slam dunk” and may involve risk.

The downside

While M&A may bring significant benefit, it comes with inherent risks and requires careful planning and execution to maximise the chance of success. Despite a solid M&A strategy, many deals fail in their implementation.

History shows that M&A deals can destroy value, instead of creating it. Daimler-Benz’s acquisition of Chrysler was intended to create a transatlantic automotive powerhouse. However, the deal suffered from cultural differences and strategic disagreements, leading to significant financial losses. Daimler eventually sold Chrysler at a substantial loss. Cultural integration must be prioritised to prevent disruptions and maintain operational efficiency. Different corporate cultures can create friction that impedes integration. When looking at potential M&A targets, it is important to assess a company’s strategy, values, leadership style and decision-making processes.

Companies pursuing growth through M&A in Africa must also take into account a range of broader strategic and operational considerations beyond the transaction itself. A key consideration is the regulatory and political environment of the target jurisdictions. Africa is not a homogenous market. Each country presents unique legal, compliance and governance frameworks that can materially impact deal feasibility and execution timelines. Regulatory approvals, foreign ownership restrictions, local content requirements and competition laws must all be navigated carefully.

In addition, macroeconomic factors such as currency volatility, inflation and fluctuating interest rates introduce further complexity into deal structuring and valuation. These dynamics can affect not only the purchase price, but also the ongoing financial performance of the combined entity post-acquisition. As such, acquirers should consider incorporating robust hedging strategies, and conduct comprehensive sensitivity and scenario analyses as part of their financial modelling. Properly anticipating and planning for these variables is critical to achieving sustainable value creation from cross-border M&A on the continent.
A thorough due diligence investigation is paramount to ensure the envisaged growth is sustainable. It can also inform the valuation of the target. Furthermore, developing a post-merger integration plan with actionable steps and clear timelines is crucial.

Conclusion

Each company and each deal are different, whether large or small. The use of corporate advisers familiar with the African M&A landscape is essential to tailor the advice to an individual situation because, when executed correctly, there is little that can beat M&A for long-term growth and value creation.

Thandiwe Nhlapho is a Corporate Financier | PSG Capital

This article first appeared in DealMakers AFRICA, the continent’s quarterly M&A publication.

DealMakers AFRICA is a quarterly M&A publication
www.dealmakersafrica.com