“It is important that the motivation for entering into such transaction align with a company’s long-term strategic goals.”
In an era of global competition, integrated markets and complex macroeconomic conditions, mergers and acquisitions (M&A) can be a reliable survival and growth strategy for struggling small to medium sized enterprises.
Take Ghana’s SMEs, which account for 92% of all the registered businesses in the country. Inadequate financing, lack of suitable management, antiquated technology, poor marketing and promotional capabilities, among other challenges, have made it very difficult for the average SME in the country to survive, let alone flourish.
Whether a company is looking to expand into new markets beyond its traditional borders, seeking additional talent with specific technical ability or simply needing to add scale to gain a competitive advantage over peers, M&A has proven to be an effective option for many entrepreneurs. Although fewer than in other developed markets, Ghanaian businesses across many industry segments, including financial services, retail banking, telecommunications, industrial manufacturing, have benefited tremendously from consolidation – in many cases as targets of an acquirer.
Following are five specific reasons why SME owners and entrepreneurs should consider consolidation as an optional pathway going forward.
1. Expanding Product Offering or Services
Acquiring or merging with another business is one of the quickest ways to expand product or service offerings and grow revenue.
In any given industry, creating a flagship brand that is widely
recognized and respected requires significant investment, time
and effort. Maintaining that brand recognition also means continued investment in marketing and advertising.
A potential M&A transaction could involve the teaming of a buyer that is flush with cash but lacks a recognizable brand with a seller that owns a well-established brand but is cash-strapped. In this case, consolidation would achieve a mutually beneficial goal of expanding and adding value to the goods or services produced.
2. Gaining Additional Technical Capabilities
A lack of skilled technical labor is driving consolidation in many industries around the globe. For example, IT companies in India are increasingly targeted for acquisition by foreign buyers looking for hard-to-find programmers and developers.
In Ghana, talent-driven acquisitions could benefit companies and industries that are lacking in new functionality, product or services. For example, commercial loan providers could potentially secure talent in the small business loan area by purchasing a microfinance entity.
3. Capturing Efficiency Savings
Efficiency savings can be achieved through an M&A transaction if it involves the acquisition of critical resources used in product development or a process or technology that improves operating costs.
This oftentimes is the case with natural resource transactions, where an end product manufacturer would buy the company that provides its raw materials. For example, a pineapple juice maker would buy a large pineapple grower in order to have better control of input pricing and lower its operating costs. For industries where fixed costs represent a substantial percentage of total costs, such as manufacturing, distribution and sales, the cost reduction benefits are most substantial.
4. Fighting off Price Competition
Ghana’s steel industry, for example, is hurting from competition – both locally and foreign-made. Already Ghana produces more steel than the local market is able to consume – by last count, installed capacity of domestic steel producers is around 450,000 tons per year compared to local demand of 300,000 tons per year.
Imports from China, Turkey, Russia, and India, among others, have further exacerbated the situation for Ghana’s steel producers. According to an industry group, much of the steel imported to Ghana is coming from China, and it is 20% to 50% cheaper than competing products, experts say.
Clearly, this industry is ripe for consolidation. By adding scale, a local steel maker could potentially improve its pricing power and at the same time have a better chance at fight off foreign competitors.
5. Accessing New Markets – Maybe Internationally
More emerging market companies are venturing outside their home base to acquire companies overseas. The companies pursuing this strategy are mostly interested in tapping into new markets and customers, or as previously mentioned, seeking to obtain strategic resources such as raw materials, technology or know-how.
There are certainly inherent risks in acquiring a business overseas, especially for a local enterprise that is not accustomed to the market and customers in that specific region. However, if hard-nosed due diligence is performed, a company may be able to find an international expansion opportunity that opens up its business to a whole new customer base.
In short, M&A is an effective growth strategy for businesses that are willing and able to invest in the right opportunities. It is important that the motivation for entering into such transaction align with a company’s long-term strategic goals. Proper due diligence is essential in order to fully understand the risks and rewards of partnering with another entity.
Many companies have experienced epic failures as a result of pursuing unsuitable acquisitions. However, more often than not, heavy-lifting in the beginning can pay off loads in the end.
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