John Bowen, KPMG in South Africa’s M&A leader for financial services, says that given the greater challenges of M&A in sub-Saharan Africa, many of the key findings of the report have always been true locally.
For instance, the report finds that cultural integration can be the difference between success and failure, whereas a high 32 percent of respondents to the report admitted their management of cultural integration was poor. This is a significant challenge, given that highly sophisticated banks tend to develop quite distinctive cultures.
If this is a challenge in Europe and North America, says Bowen, how much more is it a challenge in Africa, with its 54 nations, massive diversity in regulation and even more in language and customs.
“Africa is an environment where one cannot get away from the fact that a physical in-country presence is essential. This traverses the spectrum from soft issues – exactly what is the protocol of getting introduced to regulators and local banks in an environment where cold calling is frowned upon? – to hard issues of currency, regulation and availability of scarce skills,” explains Bowen.
Notwithstanding the number of African countries, only a handful form viable target markets at the moment. Increasingly, however, each of these is a gateway to an entire region. “Each region has unique customs and norms. Given these variables, early engagement with the regulator may be vital. It is pointless pursuing a transaction without knowing from the outset that it will receive regulatory blessing, but how to engage is the important consideration.
“Furthermore, one needs to understand the local hierarchy, particularly whether the person you’re dealing with has the requisite authority to make a decision. Or, should you be talking to somebody else?”
There’s no textbook on this and no shortcut to on-the-ground experience. “Many deals fail for the twin weaknesses of a lack of a local understanding and lack of engagement with the regulator,” adds Bowen.
Complexity of deal structure similarly does not lend itself to a fly-in approach. “Again, because of regulatory complexity and, more particularly, because of cultural diversity, the deal team has to reflect a full set of disciplines and expertise. In an environment where skills are scarce and employees already apprehensive about foreign ownership, it is vital that a communication strategy be devised to reassure all parties, both pre- and post-merger, as integration of sometimes highly distinctive cultures is more important here, than almost anywhere else in the world.”
Unseen barriers to a deal can be thrown up unless there is plenty of staff participation –
and co-operation. “Often, employees will feel threatened that a sophisticated global bank is buying them out and possibly showing them up: this only becomes exposed through considerable dialogue and establishment of a relationship of trust.”
The KPMG report found that an obvious but often neglected area in M&A is that of regular and effective communication with important stakeholders during the integration phase – especially if a deal is based on revenue synergies.
While the report emphasises communication to the market because of concerns in this environment that you may be overpaying, Bowen says that in Africa, the priority is to communicate more with other stakeholders – primarily staff and regulator.
Each of these lessons has already been observed in South Africa, where many major foreign acquisitions were far from smooth. This was notwithstanding the greater sophistication of the South African financial services sector relative to other sub-Saharan African countries.
“Therefore, the need for an exhaustive due diligence on the soft as well as hard issues cannot be over-emphasised. It is this factor alone which results in a subsequent speedy and pain-free merger.
“Too often, the complexity of an African deal persuades parties to focus on speed above thoroughness. Our research finds that time spent on due diligence is time well spent. Success comes not from speed of striking a deal but speed of integration, which itself comes from thorough planning, following thorough due diligence,” says Bowen.
Bowen believes the African market may yet avoid the impact of global volatility, as indeed may all emerging markets. The degree to which specific countries’ M&A industry will be affected by market volatility will depend on each region’s growth prospects – and Africa has one of the highest growth forecasts, according to the International Monetary Fund.
Internationally, hopes have been pinned on the strength of the economies of the BRIC (Brazil, Russia, India and China) countries, a grouping that South Africa has of course recently joined. Bowen expects these countries to boost M&A in South Africa, particularly as many BRIC companies are expected to use South Africa as a bridgehead into sub-Saharan Africa, to tap its resources and growing consumer market.