Mergers and Acquisitions in Sub-Saharan Africa

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Vertical Integration

This is a transaction that takes place when a downstream company and upstream company merge or one acquires the other. Basically, quite a number of reasons exist behind such a transaction. One of the reasons may be to internalize a problem that is an external one. In addition, an example of an external problem may be double marginalization. The occurrence of double marginalization crops up when both the downstream and the upstream companies have power that is monopolized with each company experiences dead weight losses by being in a position to reduce its output to the level of the monopoly from the competitive level. With a merger or an acquisition, a company that is vertically integrated is provided with the opportunity of collecting only one dead weight loss through setting the down stream’s company’s output to the level of competition. This has the effect of increasing consumer surplus as well as profits for the company. From this understanding, a merger that facilitates the creation of a vertically integrated company can result in high profitability.

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Table of Contents

Hiring

In some countries, certain companies use mergers and acquisitions as alternative ways to regular hiring processes. This approach is usually common or rather applied when a company is at the start up stage or if the merger and acquisition transactions target a private company that is rather small. In connection to this, the company making the acquisition simply hires staff of the private company being targeted. This results in acquisition of talent of the small private company. The small private company, therefore, undergoes dissolution a process, which involves very little legal formalities.

Absorption of Similar Business under Single Management

There may exist two portfolios that are similar and which may be invested through two different mutual funds, such as the united growth and income fund and the united money market fund. The similar investments can lead to the management of the united growth and income fund absorbing the united money market fund. Basically, this has the aim of reducing management costs making the entire investment process efficient and effective.

On the other hand, the acquisition of firms may not result to a change that is positive in line with the financial performance of the company being subject to the transaction process involved in the acquisition. For that reason, the following are some additional motives that are understood to add value to shareholders as far as mergers and acquisitions are concerned.

Diversification

Diversification can hedge a combined company or one that is acquired from a downturn. But in the case of an individual company it may not succeed in delivering value to the shareholders. This is due to the fact that there are possibilities for shareholders at their individual level to attain the same hedge through the diversification of their portfolios at a cost that is much lower as compared to the case of a merger.

Manager’s Hubris

Managerial hubris implies to a belief that is quite unrealistic which managers hold upon in bidding companies in that they can be able to efficiently manage assets belonging to a company or firm that is being targeted than the current management of the company. One of the reasons as to why investors may choose to invest in a merger is Managerial hubris. As managers may have great confidence in the synergy that they expect from mergers and acquisitions, this can lead to overpayment for the company that is being targeted. In connection to this, the value for the shareholders is thus increased.

Empire Building

Empire-building implies to the tendency of nations to obtain land, resources and economic influence across borders with the aim of expanding their wealth through economy of scale. From the business point of view, empire building is indicated when some individuals try to make attempts of gaining control over certain major initiatives or projects with the aim maximizing promotion or job security.

In the case of a company, empire building can be indicated when a member of the company attempts to enlarge its field of authority. This involves trying to acquire more power in the company in a bid to be able to command resources as well various activities within the company. It can also be done through increasing the number of subordinates or staff by the individuals seeking power and influence. Regarding empire building in connection to mergers and acquisitions the understanding is that managers are presented with the opportunity of managing large companies and thus they have more power.

The above motives are a clear demonstration of the need for cross border investors to propose for merger and acquisitions within the Sub-Saharan region of Africa. The motives highlighted show some advantages that that companies enjoy whether merged with other or acquired. Additionally, there are certain benefits identified with the customers and the economy at large due to the existence of mergers and acquisitions.

Negative Economic Impact of the Mergers and Acquisitions within Sub-Saharan Africa

The entrance of the mergers and acquisitions within Sub-Saharan Africa has also had its negative effects on the economic and living stands of the people. One of the main reason is that most of the industries within this region are still in infancy stage and are, therefore, unable to compete favorably. Lack of capital for expansion and ensuring technological advancement is another disadvantage that the firms in Africa face (Iceland 2003). Most of the employees have lost their jobs as a result of mergers and acquisitions while the rest live under the fear of job security. Most of these establishments prefer the services of experts from their countries and this leads to the loss of jobs in certain areas. In addition to that, loss of jobs is also created as a result of technological advancement. The following discussion focuses on the negative effects of mergers and acquisitions within Sub-Saharan Africa.

Creation of Unemployment

This effect was felt in many countries especially in Kenya where thousands of people were laid off. This is especially when the French mobile provider took over the operations of Kenya communication firm (McEwan and Pamela 2010, 65). The move was meant to reduce the cost of operation for the purpose of making the Telcom Kenya more competitive within the region. The issue was compounded further by the entrance of the Bharti Company in Kenya which increased more competition within the communication industry. Hundreds of people working within Telcom Kenya were retrenched while their efforts to have their jobs back did not bear any fruits. This issue is also common in other various countries within the region.

One of the main issues leading to increased unemployment is said to be the introduction of technology. This leads to replacement of the human labor by the machines. With the high number of the unemployed people in the world, the introduction of technology to replace human labor aggravates the situation. Issues of technological advancement within the African states are perceived as threats to create unemployment. For instance, the move by the government of Kenya to mechanize the tea industry was met with increased repulsion. This is because hundreds of employees who work on those farms would have been rendered jobless. However, one of the main aims of the businesses in the world is to increase profits and wealth without taking much care on such issues.

Suppression of Local Infant Industries

As stated above, most of the industries within the south of Sahara are still going through the transition stages of development. Most of these companies face the challenges of lack of capital for expansion and technological advancement. However, most of the foreign firms are able to compete effectively owing to the fact that they possess the power and expertise. Most of these companies have strong support from their mother countries and therefore giving them a competitive edge over the African companies in the world. Some of the African industries have either had to close down in order to increased losses or lay down some of its employees. For instance, the Kenya Airways and South African Airways which are some of the largest in Sub-Saharan Africa reported major losses in their annual reporting in 2012 (Founou 2006, 43). This is attributed to increased competition from other major airways in the world such as Virgin airlines, Etihad and Jetlink, which are low cost carriers. Competing with such firms becomes a major problem for the African industries.

Rise of Monopolies Leading to Increased Prices

Most of the mergers and acquisitions position themselves more of a threat to the society. This is due to the fact that they seek to take control of all the activities within the region. They achieve this through provision of the most unique services which other competitors are unable to march. In addition to that, these merger and acquisitions have access to capital and therefore have the ability to conduct market research that result in rise in number of sales and market share. Monopolies have been a major cause of pains in the lives of the society within Sub-Saharan Africa.

One of the main reasons is that the monopolies may lead to substandard goods and services. This could be explained by the fact that such monopolies do not face any competitions (Osberg 2000, 87). They purchase substandard raw materials from the producers in order to cut the cost of operation. In most countries where there is monopolization of services, society has been exploited or had the delivery of services delayed. For instance, most of the east African countries experience problems with their when using the mobile money transfer. This is especially when using the money transfer through the use of Safaricom Money transfer method. This is attributable to the fact that these companies control this system and therefore they understand that people will still have patience because they do not have any other options. The breakdown of this system is frequent and causes a lot of distress to the society especially when such people have emergencies. The fact that this is the only company that offers this type of service has made the management relax and fail to address the issue. This is one of the concomitants of the monopolies. They know that the life of the society is at their mercies and therefore they do not put any efforts to improve the life of the people.

Secondly, most of the monopolies in Sub-Saharan Africa are blamed for the increased cost of goods and services. The increase in price is caused by the similar reason that these monopolies know that they do not have a rival. For that reason, they focus on how they can increase their earning by taking advantage of the society. This is one of the major challenges that have called for the intervention of the most governments to protect the members from being exploited.

Recommendation to Make Mergers and Acquisitions More Beneficial to Sub-Saharan Africa

Mergers and acquisitions are imperative for economic growth and therefore they should be encouraged. This is despite the fact that they result in a number of disadvantages. The governments should show increased will to support these kinds of business activities within Sub-Saharan Africa for the purpose of creating more wealth and employment opportunities. However, it is imperative to come up with guidelines which must be followed by such companies for the purpose of avoiding other potential problems. The following are some of the undertakings of the government to protect the local industries while promoting the economic development.

Protection of Local Industries

Under this, the government should set guidelines that include disallowing the mergers and acquisition businesses from using the price advantage as a way of competing with the local industries. This may be achieved through setting the lowest price under which the goods and services can be offered. As indicated above, one of the major threats to the local industries is that most of them are still relying heavily on the human labor. For that purpose, they are unable focus on mass production of goods and services. In addition to that, most of these firms lack capital for expansion. For that reason, they cannot afford to offer low prices for their commodities. Despite that, the government should seek to protect such industries since their closure lead to decreased employed opportunities for the society.

The government can also achieve this goal by providing incentives to the local industries. For instance, those industries which are agricultural in nature should be protected through the provision of farming inputs. One of the major challenges to the farmers in these countries is that the cost of production is high. The price of some of the products such as the fertilizers is extremely high and this is the main reason explaining the shortage of food within this region. The government should therefore focus on lowering the price in this region. Secondly, the government should focus on lowering the interest rates of the local industries as well as giving them tax waivers. This will be imperative in ensuring that these industries become more competitive and have an added advantage over the rivals.

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Secondly, the government should protect its society against any form of exploitation. This is especially when addressing issues such as monopoly. Though the freedoms of the markets do not allow the government to interfere with market, it is the responsibility of the government to protect the society from any form of exploitation by unscrupulous businessmen. The price of the commodities should be at the normal. The government should also encourage these industries to ensure that they contribute to the society. This is in terms of the conservation of environment as well as offering employment opportunity to the less advantaged members of the society.

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