Global acquisitions: The art of it all and how startups can position to benefit

In 2020 Beyonic, a home-grown Ugandan startup providing digital payments solutions in five countries was acquired by MFS Africa, the largest digital payments hub in Africa. In a young entrepreneurial ecosystem like Uganda where many startups are fast strapped for cash, and where the failure rate is high, an acquisition of a business like Beyonic which was founded in 2013 and dominated well on the East African market raises questions on what such an acquisition means.  

Did the acquisition imply that it had failed as a company, or did its ability to get acquired say something about its high value and potential? 

In his words, Beyonic founder Luke Kyohere, says the acquisition felt right, owing to a vision shared with MFS Africa on breaking geographical boundaries by providing seamless digital payments to the last mile. Already operating in Uganda, Kenya, Ghana, Rwanda, and Tanzania, Beyonic now under MFS Africa expanded its reach in 27 African Countries with over 170 million mobile wallets and over 20 million bank accounts.  With MFS Africa’s recent partnership with Visa, which enables them to issue Visa payment credentials across their pan-African network, Kyohere called the partnership a new dawn for Small Medium Enterprises in Africa.   

Regardless of this positive example, mergers and acquisitions are shrouded in negative bias as they often connote a loss of identity and implied failure of the startup that undergoes the process. The term acquisition more so carries such heavy bias that many acquisitions are publicly referred to as mergers when technically they are acquisitions. 

The question begs, are acquisitions of startups such a bad thing? A good place to start would be in what those terms mean. In the most basic understanding, mergers and acquisition are both terms that refer to the joining of two companies, but there are key differences. 

A merger occurs when two separate entities combine forces to create a new, joint organization. Meanwhile, an acquisition refers to the takeover of one entity by another, here often a smaller company dissolves its identity into the larger company as it merges its assets. Mergers and acquisitions may be completed to expand a company’s reach or gain market share in an attempt to create shareholder value. 

From the above definition, we can conclude that there are benefits to be reaped in the merger and acquisition process for a startup depending on the goal and objectives of a startup.   

Sometimes the trajectory of growth for a startup may include getting acquired and to demystify this process, a panel of experts at The Kampala Innovation Week delved into the subject the process and benefits of global acquisitions. 

Moderated by The Innovation Village’s Samantha Niyonsaba, the panel brought together Senior Project Leader at Open Capital Advisors, Crystal Mugimba, The Founder of the startup Zofi Cash, Paul Kirungi, The Program Partner Micro Small and Medium Enterprises (MSMEs) at The Mastercard Foundation, Angela Kerubo, and Ventures Lead at The Innovation Village, Arthur Mukembo.

Panel for the Kampala Innovation Week 2021 session on global acquisition hosted by The Innovation Village.

Mugimba said there is a need to appreciate the context in which startups are operating in Uganda. The landscape has some benefits like a young and fast-growing but there is also a shortage of funding, unfavorable policies, and infrastructural limitations to mention but a few.

Crystal Mugimba, Senior Project Leader at Open Capital Adviso

 

Therefore, while a startup may be able to enjoy success to a degree, the need for growth may require it to take the next step of merging or being acquired by a larger entity that has the capacity to overcome these challenges. A successful acquisition for a startup would result in scaling its product from having the financial, talent and infrastructural wings to go beyond their current market into new areas.  

Speaking on how to get the best out of acquisitions, Mugimba suggested that startups understand that the process is meant to be a mutually beneficial relationship where the interests of two entities are catered for.  

“At the table, is an investor and a startup, each with unique needs that they need solved. For the global investor, before him is a market that is too expensive to get into from scratch and for the startup, there is a need to access finance and complementary resources to achieve the desired growth,” Mugimba says while explaining that this is the perfect context that necessitates an acquisition. 

When an acquisition successfully happens, a small startup is able to enjoy a bigger geographical foot print, access to expertise, funding and other resources. 

The larger company acquiring the startup also achieves meaningful impact in a smaller market that perhaps aligns with Sustainable Development Goals. It also gets brand recognition in a new market and it’s able to benefit from the expertise and firm foundation laid by a home-grown startup. 

Mugimba says the process, however, needs to be understood clearly to avoid disappointment or unprecedented loss. 

She offers a few pointers for startups considering acquisition. 

Rationale behind acquisition 

Many questions on whether to go through or not with an acquisition begin with exploring the rationale. Does it support the overall vision and mission of a startup? Do you want to acquire a new product that opens a new business line? Often, companies agree to acquisition by others because there is an offer, or because it seems convenient and there is excitement about the Public Relations buzz it will generate, but don’t spend enough time discussing the strategic reasons. Mugimba asks startups to reflect on the reasons and be guided by their soundness for an impactful process. 

Cultural match 

Many acquisitions can quickly go left, if cultural compatibility is not considered. An unfit acquirer could damage a winning culture that loves its people, extends trust, and operates with a positive culture. Startups can use a variety of approaches to assess the cultural fit between the two companies. It may necessitate leadership interviews, discussions with key executives, and possibly the administration of surveys across the country.  

 Putting records together 

Discrepancies during due diligence can kill acquisitions or at least hurt a startup’s valuation.  Mastercard Foundation’s Kerubo says the process of acquisition requires meticulously kept records and so engaging accountants, legal, and Human resource departments who can get you the relevant paperwork goes a long way. She asks startups to break out of their cocoons and actively seek the professional legal support they need throughout the process.

Angela Kerubo, Program Partner Micro Small and Medium Enterprises (MSMEs) at The Mastercard Foundation

 

Managing the team transitions 

Often startup teams spend a lot of time building a business maybe threatened by the M&As as they are uncertain about the future, and their place in the company. This uncertainty may lead to a panic rush out of the company, resulting in a brain drain that reduces the value of the startup. Mugimba says it’s important to consider this before acquisition and during the process. Startups need to use the due diligence process not to simply tick boxes on a list, but to get to know the teams involved in acquisition better. Instead of announcing the acquisition, her advice is for the startup founder to discuss the changes happening internally and equip the team with the resources and information to adapt.  

Building Relationships 

The most important thing in the acquisition process is a relationship built over time with enough transparency about the goals, ethics and best practices for each party.  

For Beyonic and MFS Africa, for instance, the acquisition happened after seven years of a relationship where the two companies supported each other in some capacity.   

In seeking acquisition, startups ought to be selective about the company that they want to merge with or be acquired by. It should begin with buying into the vision of the other company. Short of this, she notes that the future becomes fraught with clashes in direction and goals which weakens the partnership. 

Kerubo, on the other hand, says startups seeking this strategic direction need to be open about their needs and to advocate actively for themselves at the negotiation table.  

The Innovation Village’s support 

The Lead for Ventures at The Innovation Village, Arthur Mukembo says that for startups to get the best out of acquisitions, timing is a key factor. Knowing when the time is ripe for an acquisition is a question best answered by the startup. However, it can use the indicator of the value it has to offer. He advises against startups rushing into acquisitions before they have built value that gives them an edge. 

Arthur Mukembo, Ventures Lead at The Innovation Village

 

Mastering the local markets well and getting a product fit increases the startup’s value which gives them better negotiation power during an acquisition and therefore better outcomes.   

To ensure the success of this process, The Future Lab Lead Samantha Niyonsaba says that The Innovation Village occupies the role of an enabler in the ecosystem to both startups and investors. 

Samantha Niyonsaba Karama, Future Lab Lead, The Innovation Village

By providing resources like funding, accelerator programs, platforms and mentorship to startups, The Innovation Village ensures that startups are resilient against the challenges of the ecosystem, registering success in their markets that makes them investor ready and scalable. For investors, The Innovation Village offers a pool of vetted startups that are bankable and impactful in their local market as they solve contemporary and future challenges. With all these initiatives in place, we believe startups and investors can find common ground and tap into each other’s value.  

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