Introduction
In today's changing business world, mergers and acquisitions (M&A) have become important
tools that companies use to grow, diversify their operations and achieve better economies of
scale. At the same time, businesses often face financial difficulties which means they need to
restructure their operations to get back on stable ground. In Tanzania, just like in other countries
around the world, distress restructuring involves complex processes that include different
strategies and concepts. This paper explains the basic concepts of cooperative restructuring and
how it relates to distress restructuring, with special attention to mergers and acquisitions in
Tanzania. By looking at various parts of M&A including the reasons behind them, tax
implications, synergies that can be achieved, how companies are valued, risks to shareholders,
other restructuring methods, and real examples from Tanzania's market, this paper also examines
distress restructuring - particularly what happens when companies face financial problems,
whether to liquidate or reorganize, comparing private workouts with bankruptcy procedures, and
the idea of pre-packed bankruptcy. Through studying these concepts, this paper aims to give a
complete understanding of distress restructuring and cooperative restructuring, especially
mergers and acquisitions in Tanzania's business environment, using relevant examples and
discussions from recent literature.
1. The concept of Mergers and Acquisitions
According to recent business literature, a merger basically means acquiring shares that results in
a change of control of a business or part of a business or its assets (Rosenbaum & Pearl, 2020).
Most of the time, a merger can be seen as a takeover since by definition, mergers usually result
in control changes in any part of a business. An acquisition on the other hand, when it comes to
shares or assets, involves either getting legal interest in assets or equitable interest in shares. This
definition isn't as broad as merger and doesn't include acquisition through charge only.
Mergers and acquisitions are complicated transactions that involve combining or transferring
ownership between two or more companies. The reasons for these transactions can be put into
two main categories: strategic and financial motives (Gaughan, 2019).
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Strategic motives include many different objectives like expanding market share, diversifying
what products or services they offer, getting access to new technologies or intellectual property,
and making their competitive position stronger. Companies might want to merge with or buy
another company to achieve economies of scale, reduce costs through synergies, or get into new
geographic markets (DePamphilis, 2021).
Financial motives are driven by wanting to increase shareholder value, improve how profitable
they are, or take advantage of assets that are undervalued. M&A activities can be used as tools
for restructuring, consolidating operations, or getting tax benefits (Bruner, 2019).
2. The Tax Forms of Mergers and Acquisitions
Tax issues play a big role in how M&A transactions are structured. The tax forms of mergers and
acquisitions can be basically divided into two types: taxable and tax-free (or tax-deferred)
transactions (Bittker & Eustice, 2022).
a. Taxable Transactions: In taxable transactions, the target company's shareholders have to pay
taxes immediately on any gains they make from selling their shares or assets. This type of
transaction is often preferred when the acquiring company wants to "step up" the tax basis of the
assets they're buying, which allows for higher depreciation deductions and potential tax savings
later (Scholes et al., 2020). However, the immediate tax burden can be quite large and might
affect the overall deal value.
b. Tax-Free (or Tax-Deferred) Transactions: In tax-free or tax-deferred transactions, the
target company's shareholders don't have to pay taxes immediately on the gains from exchanging
their shares or assets. Instead, they can defer the tax liability until they eventually sell the
acquired shares or assets. This type of transaction is usually preferred when the parties want to
avoid immediate tax burden and take advantage of potential long-term tax benefits (Bittker &
Eustice, 2022). But the future tax implications need to be carefully thought about.
3. Synergies from Mergers and Acquisitions
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One of the main reasons companies pursue M&A activities is to achieve synergies, which can be
divided into two categories: operational synergies and financial synergies (Damodaran, 2021).
a. Operational Synergies: Operational synergies refer to potential cost savings and revenue
improvements that can be achieved when two or more companies combine. These synergies
might come from economies of scale, better bargaining power with suppliers or customers,
shared resources or technologies, and getting rid of redundant functions or operations (Gaughan,
2019). Good integration and execution are crucial to actually achieving these synergies.
b. Financial Synergies: Financial synergies are about the potential benefits from improved
capital structure, increased cash flow, and risk diversification that comes with the combined
entity. These synergies might result from lower financing costs, tax benefits, or reduced volatility
in earnings or cash flows (DePamphilis, 2021). However achieving these synergies requires
careful financial planning and management.
4. Valuing the Firm in Mergers and Acquisitions
Valuing the target company is a crucial part of M&A transactions since it serves as the
foundation for determining the right purchase price and structuring the deal. Different valuation
methods are used in M&A context, each with its own strengths and weaknesses (Damodaran,
2021). A comprehensive valuation approach combines multiple methods including:
a. Discounted Cash Flow (DCF) Analysis: The DCF analysis is commonly used valuation
method that involves estimating the present value of the target company's future cash flows. This
method considers the company's projected financial performance, growth rates, and the required
rate of return (Petitt & Ferris, 2019). However it relies heavily on accurate forecasting and
assumptions.
b. Comparable Company Analysis: This valuation approach involves finding and analyzing
comparable publicly traded companies in the same industry or sector. The target company's value
is determined by comparing its financial metrics like price-to-earnings (P/E) ratios, enterprise
value-to-EBITDA multiples, or other relevant multiples with those of comparable companies
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(Rosenbaum & Pearl, 2020). How reliable this method is depends on whether truly comparable
companies are available.
c. Precedent Transaction Analysis: This method relies on analyzing and comparing the target
company's financial metrics with similar companies that have been involved in recent M&A
transactions. The valuation is based on the multiples or premiums paid in these previous
transactions (DePamphilis, 2021). However, how comparable the transactions are and whether
reliable data is available can be challenging.
d. Asset-Based Valuation: In asset-based valuation, the target company's value is determined by
appraising and adding up the fair market value of its individual assets, minus any liabilities. This
approach is often used for companies with significant tangible assets or when the company's
future cash flows are uncertain or hard to estimate (Damodaran, 2021). However it might
overlook intangible assets and future growth potential.
5. A Cost to Stockholders from Reduction in Risk
Even though mergers and acquisitions offer potential benefits, they also carry risks and potential
costs for stockholders. One such cost comes from the reduction in risk associated with the
combined entity, which can be seen as a potential drawback for stockholders who want higher-
risk, higher-return investment opportunities (Brealey et al., 2024).
When two companies merge or one company acquires another, the resulting combined entity
typically shows a lower level of risk compared to the individual companies. This reduction in
risk can be attributed to factors like diversification of operations, increased financial stability,
and a broader portfolio of products or services (Gaughan, 2019).
For stockholders who have invested in a particular company expecting higher returns that come
with higher risk, the reduction in risk from an M&A transaction might be seen as a cost. These
stockholders might view the reduced risk as limiting potential upside gains, since the combined
entity's stock price might not experience the same level of volatility or growth potential as the
individual companies (Brealey et al., 2024).
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6. Other Methods of Restructuring
While mergers and acquisitions are prominent forms of cooperative restructuring, there are other
methods that companies can consider to achieve their strategic objectives. These include:
a. Joint Ventures: A joint venture involves creating a new business entity or contractual
arrangement between two or more companies. This approach allows companies to share
resources, risks, and rewards while keeping their independent operations and identities
(Gaughan, 2019). Joint ventures can be effective ways to enter new markets or combine
complementary strengths without the full integration required in merger or acquisition.
b. Strategic Alliances: Strategic alliances refer to collaborative arrangements between
companies, often involving sharing resources, technologies, or market access without forming a
new legal entity. These alliances can take various forms like licensing agreements, marketing
collaborations, or research and development partnerships (DePamphilis, 2021). Strategic
alliances can provide access to new capabilities or markets without the complexities of full
merger or acquisition. For example, the partnership between Vodacom Tanzania and Safaricom
Kenya to launch the M-Pesa mobile money service shows a strategic alliance that changed the
financial services landscape in Tanzania.
c. Divestitures: Divestitures involve selling or spinning off a portion of a company's assets or
business units. This restructuring method is often used to streamline operations, focus on core
competencies, or raise capital for other strategic initiatives (Gaughan, 2019). Divestitures can
help companies optimize their portfolio and allocate resources more efficiently.
d. Restructuring: Restructuring refers to significant changes in a company's operational
structure, financial structure, or organizational structure. This can involve cost-cutting measures,
asset sales, debt restructuring, or organizational realignments (DePamphilis, 2021). Restructuring
can be a way for companies to adapt to changing market conditions, improve efficiency, or
address financial challenges.
7. Evidence on Mergers and Acquisitions in Tanzania
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The regulatory system governing mergers and acquisitions in Tanzania is comprehensive,
including various statutes and authorities. The Fair Competition Act 2003 is the primary
legislation regulating M&As in Tanzania, with the Fair Competition Commission (FCC) serving
as the regulatory body and first-tier quasi-tribunal forum for competition and antitrust disputes
(Fair Competition Commission, 2019). The FCC is responsible for controlling mergers and
acquisitions that significantly prevent, restrict, or distort competition in relevant markets, making
sure that markets in different sectors of the economy remain competitive.
M&As in Tanzania have been increasing, with the financial sector being the industry with the
largest M&A activity in terms of transaction value. The main sectors driving M&A activity in
Tanzania during recent years were mining, agriculture, energy, banking, insurance, telecoms, and
healthcare. For example, the merging of Twigabankcorp, Tanzania women bank, and TPB bank
in 2018, and the merging of Tanzania Bank and Bank M Limited in 2019. Exim bank also
announced to acquire assets of UBL bank in the same year, and Equity bank, NIC bank, and
CBA bank were involved in similar deals. In private deals, we saw the acquisition by Jehangir
Kermali Bhaloo of shares in the acquisition of additional shares by East African Breweries in
Serengeti Breweries, and the sale of Kuku Foods to Dough Works.
In 2019, GW Security Holding Cayman Limited trading as Garda World acquired Ultimate
Security Tanzania Limited, a company incorporated under Tanzania laws. GardaWorld had
previously acquired KK Security in 2016 and rebranded to operate as stand-alone brand in
Tanzania in 2019. With more than 3,700 clients and over 8,500 security staff, GardaWorld is
now the largest security company in Tanzania. In the same year, Barrick Gold acquired Acacia
Mining Plc, and Orecorp Tanzania acquired Nyanza Mining Company. In 2020, TPB Bank Plc's
merger with TIB Corporate Bank Limited was finalized, making TPB one of the top banks in
Tanzania in terms of assets value in the market (ABC Attorneys, 2020).
Distress Restructuring
1. What Happens in Financial Distress
Financial distress happens when a company faces significant challenges in meeting its financial
obligations due to various internal and external factors. Signs of financial distress might include
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declining revenues, deteriorating profitability, liquidity problems, and mounting debt burdens
(Smith, 2021). In such situations, companies often experience increased pressure from creditors,
shareholders, and other stakeholders, as well as decline in market confidence. Without timely
intervention, financial distress can escalate leading to insolvency and potentially resulting in the
company's failure.
Research by Altman (2019) highlights that financial distress can stem from factors like poor
management decisions, economic downturns, industry disruptions, or excessive leverage. For
example, in the case of Kodak, once a photography giant, financial distress happened because the
company failed to adapt to digital technology trends, leading to obsolescence of its traditional
film business.
2. Liquidation and Reorganization
When facing financial distress, companies have two primary options: liquidation and
reorganization. Liquidation involves orderly winding up of the company's operations, sale of
assets, and distribution of proceeds to creditors and shareholders. While liquidation provides
straightforward exit strategy, it often results in significant losses for stakeholders and the end of
business activities (Altman, 2019).
On the other hand, reorganization involves restructuring the company's operations, finances, and
ownership structure to help it survive and recover. This might involve measures like debt
restructuring, renegotiation of contracts, selling non-core assets, and equity infusion.
Reorganization aims to address the underlying issues causing financial distress and position the
company for sustainable growth (Barry & Holod, 2020).
3. Private Workout versus Bankruptcy
In distress restructuring, companies might choose between private workouts and bankruptcy
proceedings to address their financial challenges. Private workouts involve negotiations between
the company and its creditors outside of formal legal processes, with the goal of reaching
mutually beneficial agreements to resolve outstanding debts and restructure obligations. Private
workouts offer flexibility and confidentiality but require cooperation from all parties involved.
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On the other hand, bankruptcy involves starting legal proceedings where the company seeks
protection from creditors while restructuring its debts and operations under court supervision.
Bankruptcy proceedings can take various forms like Chapter 11 in the United States or
administration in the United Kingdom, each with its own set of rules and procedures. While
bankruptcy provides structured framework for restructuring, it can be costly and result in loss of
control for the company (Gup, 2019).
4. Pre-packed Bankruptcy: A Strategic Approach
Pre-packed bankruptcy, also known as pre-packaged or pre-arranged bankruptcy, is strategic
approach to restructuring where the company negotiates and prepares a restructuring plan with
its creditors before starting formal bankruptcy proceedings. The pre-packaged plan outlines the
terms of debt restructuring, asset sales, and operational changes, which are then implemented
quickly upon filing for bankruptcy. Pre-packed bankruptcy aims to speed up the restructuring
process, minimize disruption to business operations, and maximize value for stakeholders
(Hotchkiss & Mooradian, 2020).
Conclusion
In summary, this paper has carefully examined the complexities of cooperative restructuring,
notably mergers and acquisitions (M&A), alongside distress restructuring, with focus on the
Tanzanian business environment. Through extensive exploration of fundamental concepts, the
discussion has explained the strategic and financial motivations behind M&A transactions,
emphasizing the importance of synergies, valuation methods, and implications for stakeholders.
Moreover, alternative restructuring methods beyond M&A have been explained, offering
companies a range of strategies to achieve their strategic goals while adapting to the dynamic
business landscape.
Furthermore, the paper has provided comprehensive analysis of distress restructuring, outlining
the challenges companies face during financial distress and explaining the available strategies
like liquidation, reorganization, private workouts, and bankruptcy proceedings. Notably, the
concept of pre-packed bankruptcy has been introduced as strategic tool to streamline the
restructuring process. By grounding the discussion with empirical evidence from Tanzania,
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including notable M&A transactions and restructuring efforts, the paper has enriched our
understanding of cooperative and distress restructuring in the Tanzanian context, offering
valuable insights for academics, practitioners, and policymakers.
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