In the world of corporate finance, an acquisition is considered to be a transaction in which an individual or entity (company) purchases some or all of the shares of a business. In South Africa, mergers and acquisitions are in part regulated by the Companies Act No 71 of 2008 (Companies Act). Acquisitions are a popular way to encourage business growth, diversification of business, increased market share within an industry, certain cost reductions and more.
In this article, we will discuss the law relating to acquisitions in South Africa, the different types of acquisitions that can be implemented, what the purpose of each is, and why one would require when an acquisition is taking place.
Types of Acquisitions in South Africa
There are 4 types of acquisitions that can be performed, and each is employed for a different reason. These 4 types of acquisitions consist of:
A vertical acquisition refers to a company either acquiring a business above or below it in their supply chain. This is typically done because it is cost-effective in the long run. It is also more efficient to purchase an existing company than to build one. Thus, it would be beneficial to the manufacturer if they purchased a distributor.
A horizontal acquisition takes place when one company acquires another company that offers similar or perhaps the same products or services as them. This is typically done to increase a company’s market share or remove its competitors from the market.
Conglomerate acquisitions occur when a company is acquired by another company that has nothing in common with it. Thus, they are not competitors nor are they within the same supply chain. Conglomerate acquisitions often occur when a variety of companies fall under the same umbrella or have the same parent company. This is done to ensure stability within the market as it is very rare that all of the industries will take a dip at the same time; thus, it acts as a sort of safety net.
Market Extension Acquisitions
If companies that are in the same industry but are not servicing the same market enter into an acquisition it is known as a market extension acquisition. This is because the company is broadening the market it services, without the hassle of entering a different market as a competitor.
Mergers and Acquisitions Lawyers: Why They Are Needed
Mergers and acquisitions lawyers are essential when it comes to acquiring another company or selling shares in a company. There are fine details that should be checked before signing contracts, and above all it must be ensured that the acquisition process is compliant with the law.
To find out more about mergers and acquisitions law in South Africa, contact Adams and Adams.