Establishing a strategic rationale and preparing for a merger

With the developments and reforms in various sectors in Ethiopia, including financial services, real estate, manufacturing and other key sectors, creates an opportunity to unlock value in mergers and acquisitions in the country.

As well as offering significant opportunities, mergers and acquisitions are highly complex and risky transactions. From deal strategy and due diligence, to agreeing terms and integrating or selling a business, Grant Thornton goes beyond the normal advisory role to help you overcome those challenges.

How do you establish a strategic rationale?

Determining whether a concise and tangible strategic rationale exists is a critical part of planning for a successful merger. A strategic rationale in this sense can be thought of as the synergies that will unlock value in the merged entity. In other words, we look for a situation where the whole is greater than the sum of its parts.

Thinking about what target firms want

Each successful transaction will grow from the unique aspects of the deal that make it appealing to the merging firm. Before you consider what value, you can build together, you must first address any fears the target firm has about losing its existing value. To do so, we have found that target firms need to have confidence and clarity concerning the following:

1.?Earnings– while some target firms just want 'more money', often their need is for clarity about how earnings will be calculated and shared.

2.?Parity – one of the principles of fairness is that you receive similar rewards to your peers assuming for skill, performance, experience, seniority, etc.? In this area, parity is likely to be an issue at both the earnings and equity levels.

3.??Value recognized – in many cases the target firm's partners will have spent many years building a firm with strong earnings and market position.? They will want to see this value reflected in the consideration offered.?

4.??Confidence in and/or appropriate input into the leadership of the firm – this will depend on the relative size of the target, but it is important to remember that pre-transaction, the target firm controls its own destiny and answers to no one but themselves with respect to operational decisions.

During the initial discussion stages, each of these items should be addressed with the target firm to provide comfort that the strengths of their existing practice will be built upon and not lost. In addition, the target firm should be asked what they want from the merger and what their concerns are so these can be addressed early in the process.

Preparing for a merger

Preparing your firm for a merger is an opportunity to correct weaknesses and build on your existing strengths. Mergers place additional pressure on a firm’s infrastructure and therefore have the ability to magnify even seemingly insignificant weaknesses in the practice. Correcting these weaknesses will not only make you more attractive to potential targets but will also greatly improve your chances of creating long-term value.

Establishing value

In larger transactions, it is likely that you will need to assert the value of your firm (at least relative to the firm you are purchasing). It is therefore prudent to think about the factors influencing your value prior to engaging and take steps to mitigate or correct any perceived issues. Issues such as pending legal disputes, uncertainty with respect to property leases, or other contingencies are likely to impact negatively on value. Correcting such issues prior to engaging with a target will help to ensure a deal that accurately reflects the value of your practice.

Grant Thornton works with entrepreneurial businesses in the mid-market to help them assess the true commercial potential of their planned acquisition and understand how the purchase might serve their longer-term strategic goals. Through our highly experienced Transactions Advisory team, we offer seamless access to a full range of transactional and other advisory services to ensure you get maximum value from your deals.

If you are looking to buy a business, private equity advisory, exit strategy services, performance improvement of your business, valuations, selling a business, raising finance, tax structuring or simply financial reporting, talk to us to find out more about how the team can support your strategic growth decision making.

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