DealMakers - Q3 2020
Changing corporate purpose is set to transform M&A decision-making in South Africa
Over the last few years, the focus of business has been gradually, but deliberately, shifting.
Whereas in the past, the main objective of most companies was to optimise profitability for maximum shareholder benefit, most organisations are today taking an approach that is far more inclusive and cognisant of the needs of all their stakeholders, particularly the communities in which they operate.
Often referred to as an organisation’s ‘social contract’, this shift from a pure shareholder value focus to a more sustainable perspective, effectively balances profitability (which is obviously essential) with a sincere commitment to the wellbeing of employees, customers and surrounding communities.
While this transition was already underway in many industries, the global COVID crisis has undoubtedly increased the sense of urgency for it, and accelerated its momentum. This is not just as a consequence of questions being asked around the sustainability of purely profit-focused organisations, but more so because of the significant awareness created in all stakeholders of the moral imperative that every company has to uplift and empower others.
Given the high likelihood that this awareness will continue to grow in the future, it is clear that focusing on shareholder value maximisation at the expense of everything else will almost certainly spell the downfall of any business. This is especially true in the South African context, where the legacy of inequality and discrimination continues to hold the majority of the population in poverty.
The past 26 years have shown us that broad-based black economic empowerment (B-BBEE) scorecards are not enough to change this situation. What is required is genuine commitment from the private sector and its investors to use the resources at their disposal to drive the transformation that is so urgently needed.
Fortunately, this awareness appears to be taking root, as evidenced by the significant increase in investment focused on impact in addition to returns, the adoption of business frameworks and strategies built on sustainable development principles, the prioritisation of good governance, ethics and values-driven business models, and the recognition of environmental, social and governance (ESG) factors as material risks (and opportunities) that have a direct impact on financial performance.
This focus on ensuring that corporate strategy aligns with social purpose has significant implications for mergers and acquisitions. While it’s unlikely that the primary motivation for any M&A transaction will ever be anything other than bottom-line benefits, the elements making up that bottom-line are most certainly changing. Irrespective of whether the investing party is a private equity fund, family office, investment holding company or another business, the importance of social contract alignment between all transaction parties is likely to be at the top of most due diligence checklists.
And so it should be. Alignment of company cultures in a merger or acquisition has long been accepted as a key success determinant. So, as social commitment becomes more of a business priority, it will also increasingly become a key culture alignment consideration. This is especially true for businesses that have a direct link to consumers. As recent controversies have shown, customers have more influence than ever before, and if a business doesn’t practice what it preaches, it is likely to be harshly punished by its market. And managing this reputational risk has to be a key consideration when choosing a business to invest in, or with which to partner.
Quite apart from this reputational risk of not partnering with other businesses that share your social commitment, the overall measure of the long-term success of M&A transactions is most definitely shifting. Financial performance is all very well, but if an investment or acquisition is seen to compromise the acquirer’s commitment to, or achievement of its ESG and sustainable development objectives, the longer term damage could be catastrophic.
Of course, the opposite is also true. Which is why it’s likely that a company that puts a priority on ensuring it has a very strong social license to operate, will not only increase its appeal amongst customers, but also significantly enhance its perceived value, should the need ever arise to seek out investors or business partners. n
Rampedi is a Corporate Finance Associate, Nedbank CIB.