South Africans are repeatedly cautioned against a predicted ‘bumpy ride’ for 2024, considering the poor economic outlook, low GDP growth, combined with the uncertainty brought about by the upcoming political elections and Eskom’s inability to procure a stable supply of electricity. Yet, despite the similarly bleak outlook experienced in 2023, the country has experienced a continued uptick in local M&A activity, especially in the private sectors connected to finance, financial technology, and retail. And according to Investec South Africa’s Corporate Finance team, there are a few key M&A themes to keep an eye on, going into 2024.
The pressure on certain businesses to realise pre-covid performances, together with drivers such as an increased focus on stability and sustainability; the amplified race to employ generative artificial intelligence; and the weight placed on stronger balance sheets and new ESG requirements, may have all contributed to the upward trend in local M&A.
Traditionally, M&A transactions comprise various phases, involving a prospective buyer conducting a due diligence on a target company; price and transaction structure negotiations; and ultimately the conclusion of a definitive purchase agreement. An M&A transaction can take several months to finalise, and there are a number of basic legal steps to consider during the deal negotiations and transaction implementation phases:
Offering document and LOI:
Should you be the seller, you will compile an ‘offering document’ or ‘company/business profile’ which will contain sufficient information for a prospective buyer to consider and hopefully make an offer to purchase.
The prospective buyer will, following a consideration of the ‘offering document’ or other information concerning the target company/business, provide the seller with an indication of its interest to acquire the business or company – usually referred to as a ‘letter of intent’ (or the “LOI”). Although the LOI is a formal letter expressing an interest, it is usually non-binding, so either of the parties can still walk away for the prospective opportunity to acquire or sell.
Non-Disclosure and Confidentiality Agreement:
Should the parties proceed to engage with one another based on an LOI, the next phase is usually the conclusion of a Non-Disclosure and Confidentiality Agreement (the “NDA”). The NDA will be a legally binding contract in terms whereof the purchaser undertakes to keep all information in relation to the seller’s business operations and company confidential during the negotiations process and due-diligence periods (and for a prescribed or indefinite period thereafter).
The purpose of the NDA is to protect the seller’s business information, trade secrets, financials, intellectual property, private information and any other information material to the target company or business’ success – and of course, negotiations and discussions surrounding the possible merger and / or acquisition.
Conduct management meetings:
It is usually advised that the terms and undertakings of the NDA are equally enforced upon employees and management of the buyer entity and as such, it is advisable to schedule management meetings in the early stages of the proposed transaction. Management meetings will provide the prospective buyer and the seller with the opportunity to meet face-to-face to determine the timelines surrounding negotiations, due diligence investigations and other timelines.
In addition, management should be made aware of the fact that the potential business sale must be a closely guarded secret and as such, only a select few are to be involved in the process until the time is right to make an announcement to employees and the public.
Due diligence investigations:
A due diligence investigation allows the prospective buyer to investigate and assess the status of the business or company by inspecting its’ financials, records, contracts, and more – in order to verify that all the seller’s presentations and proposed valuations are accurate.
The due diligence investigation also allows for the prospective buyer to highlight risks identified and request certain representations, warranties and indemnities from the seller in order to limit those risks identified.
Transaction Implementation Documents:
Traditionally, and parallel to the due diligence investigation, the parties would enter into a transactional implementation agreement – usually subject to the completion of the due diligence investigation to the purchasers’ satisfaction, and other applicable regulatory approvals. The legal structure of the transaction may be dictated by drivers such as tax considerations, the buyer’s existing group structure and, of course, the buyer’s appetite for risk.
The transaction may constitute a sale of shares, sale of business or business assets. The transaction implementation agreements will dictate the purchase price, payment structure, warranties, indemnities, disclosures, restraints and non-compete agreements, and post-closing obligations.
A Merger & Acquisition can present excellent growth and expansion opportunities for a business, provided the M&A was strategically assessed in line with the drivers for expansion of the specific buyer.
It is therefore paramount to ensure that you appoint an experienced corporate finance advisor and legal team to assist you in navigating the maze of M&A activity in 2024.
By Derek Brits