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This resource is hosted by the Nelson Mandela Foundation, but was compiled and authored by Padraig O’Malley. It is the product of almost two decades of research and includes analyses, chronologies, historical documents, and interviews from the apartheid and post-apartheid eras.

BEE moving away from favouring a few groups

Trend to put clear incentives and targets for BEE partners to deliver value, says Ernst & Young M&A book

Johannesburg, 4 April 2006: : Black Economic Empowerment (BEE) trends during 2005 included several positive developments indicating that BEE is entering a mature business cycle. This is according to the 15th Ernst & Young Mergers & Acquisitions: A Review of Activity.

The 15th Ernst & Young review analysed 238 BEE deals with a combined value of R56,2 billion reported in 2005. The number of transactions in 2005 dropped slightly from 243 in 2004, but the combined deal value was higher than the previous year's R49,9 billion.

The Ernst & Young M&A Review is an independent analysis of all merger and acquisition activity in South Africa. It is a reference of record for the corporate finance, legal, brokerage, academic and media communities, and it has provided the longest-running overview of M&A activity in South Africa.

An ongoing issue for BEE transactions is the measurement of the value they can potentially deliver. Ernst & Young Corporate Finance Associate Director, Ashraf Dada, says companies like Old Mutual and Nedbank have addressed this by making a proportion of the shares to be allocated to BEE shareholders subject to an earn-out based on agreed levels of contribution by the BEE shareholders to the company's operations.

Dada says the Old Mutual deal was a good example of one of the key BEE trends of 2005, which was to include black management and staff in employee trust schemes. "One of the tangible benefits is increased motivation and retention of staff."

The features of the Old Mutual deal include that it is broad-based and there are clear incentives for the empowerment business partners. "Meeting the targets will result in the financing rates being eased."

Some of the targets set for the empowerment parties include business development, assisting the companies in the Old Mutual Group to meet the Financial Sector Charter requirements, and helping the companies meet transformation and employment equity targets.

In the 2005 Ernst & Young review, 50 BEE transactions were analysed that had a value over R100m. Dada says that to link BEE to the creation of shareholder value, a number of deals analysed included a significant allocation of shares to employees of the company that otherwise would not have qualified for inclusion in an Employee Share Option Scheme.

Balancing the value versus the cost of doing BEE transactions remains an issue for shareholders, and the 15th edition shows how companies are increasingly disclosing the cost of doing a BEE deal.

"BEE deals come at a cost to existing shareholders, whether as a result of being asked to give up a portion of their existing holdings at a discount to market price or as a result of the company assisting with funding. There is also a cost associated with management time and advisor fees. Management's responsibility is to ensure that BEE becomes a value exchange, not a value giveaway.

Dada says that during 2005, it was also noticeable that BEE deals responded to growing calls from several quarters for greater inclusiveness rather than focusing only on a select few groups or individuals.

"Since its inception, the BEE process has struggled to achieve broad-based empowerment as opposed to selective enrichment. We noticed last year that there appeared to be a relative reduction in the involvement of the established groups, and we saw the emergence of new groupings, often incorporating high profile individuals."

Dada cites examples such as Amabhubesi's involvement in the Old Mutual and Growthpoint empowerment deals, and Lereko which was involved in the Imperial Holdings deal.

In 2005, women's groups became an increasingly prominent feature of broad-based consortia in BEE deals. Apart from the obviously desirable benefit of harnessing the talents of a major component of SA's population, it can increase the points available from the ownership section of the various Charters and the draft Codes of Good Practice on Broad-Based Black Economic Empowerment.

Dada concludes: "Corporates obviously want a BEE shareholder led by individuals who have developed a track record. But the exodus of these individuals from their current management roles to become empowerment entrepreneurs drains the skills pool, particularly if adequate succession plans are not in place."

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