It is often said that beyond every revolution, lies opportunity. This statement is more relevant in the context of the current economic depression which collapsed the global markets over the past few years. There has been optimism generally on the impending economic recovery in South Africa, which in turn, is likely to fuel the appetite for investments through mergers and acquisitions.

In any industry, mergers and acquisitions are inevitable. They are necessary occurrences for any business that seeks upward growth. However, potential investors should ideally exercise caution when investing in recovering economies. At the forefront of such transactions should be an intensive due diligence investigations by the management of both entities. This is important to determine whether or not the information disclosed regarding the proposed transaction is accurate and correct. The key assumptions provided in the proposal for investment must also be deemed accurate.

In practice, mergers and acquisitions are handled by teams composed of members with extensive experience and expertise in mergers and acquisitions as well as in specific areas of function. The team must be composed of members with background in the following disciplines: Accounting; Tax; Risk Management; Human Resources; Legal/ Regulatory Compliance; Environmental; Information Technology; Operations; and Sales.

Mergers and acquisition in South Africa are regulated by the Competition Act, 89 of 1998 as amended, and the Companies Act, 71 of 2008 (the latter is expected to come into operation in July 2010). In terms of section 113 of the Companies Act, when conducting a merger, both companies need to satisfy the solvency and liquidity test. What is meant by that is, at the relevant time in question, the company's assets, fairly valued, are equal to or exceed its liabilities and it is able to pay its debts as they fall due in the ordinary course of business. This reiterates the need to conduct an effective and extensive due diligence inquiry before such a transaction can be concluded.

Although the rules of practice (due diligence inquiries) in respect of mergers and acquisitions have been religiously followed in the past, judging by the number of successful transactions in South Africa, the dynamics of the game in a post-recession environment are different, and as a result, require a stricter and more risk inclined approach.

Written by: Pule Malahlela, corporate law consultant at Masephule Dinga Inc