MIDLANDS STATE UNIVERSITY

GRADUATE SCHOOL OF BUSINESS LEDERSHIP

MASTERS IN BUSINESS ADMINISTRATION

STRATEGIC MANAGEMENT

Should Zimbabwean companies unbundle in order to survive 2010

MAPETERE DONDISESEDZAI R09419G MR MAZARURA 23 FEBRUARY 2010

For the past decade Zimbabwe has been facing serious economic challenges, most emanating from the sanctions imposed by the western countries. A hyperinflationary environment characterised the greater part of the past three years calling for other measures of survival other than core business for most companies. An economic crisis characterised by high inflation and foreign exchange shortages saw companies preserving value through acquisitions of noncore businesses.Most companies needed forex to run their business and this was not available. Instead of closing down, most companies opted to venture into other businesses that were profitable at that point in time. 2009 ushered in a favourable economic environment through dollarisation and the formation of the Government of National Unity. These could be reasons why companies that had bundled up in order t survive should start unbundling for effective management of businesses.

During the commencement of the previous year, Delta chief executive officer made known to the market his intention to sell the groups shareholding in Ariston Holdings. His announcement came a few months after the political rivals Zanu PF and MDC had joined forces and decided to get into a union. The economy had also been dollarized, resulting in price stability. Deltas decision to sell the shares in Ariston was not a good move. All it needed to do was to its restore its core business and run Ariston separately given that Ariston had been the companys foreign currency source during economic crisis.

A few months after Deltas CEO made this decision, most companies followed suit by closing down their non core business instead of running them separately given that the bottom line in any business is to make profits. Imara Asset management CEO John Legat believes the year 2010 may bring back Zimbabwean companies back to their feet but this is not a leeway for non core businesses to be closed down for reasons already stated. Companies like African Banking Corporation Holdings (ABCH) has joined the other companies that have resorted to core business despite the fact that the life span of the government of national unity [which is one factor that restored economic stability] is uncertain. If the GNU collapses, all companies that closed down non core business may run out of business again. Organizations such as mobile phone group Econet Wireless started some valuable non-core businesses during the crisis by buying significant shareholding in the then First Mutual Limited and Mutare Bottling Corporation, to mention a few. There was market speculation last year that Econet was selling its bottling company. This year Econet seems to have reconsidered this supposition and this is a good move. All that needs to be done is to make sure that Econet unbundles and runs its non core activities separately from its core business. ABCH CEO says the group is also divesting out of non-financial holdings including 22,3% shareholding in Starafrica, 14,5% in PG Industries Zimbabwe and another 30% in PG Botswana. The CEO said: We are in the process of disposing our Starafrica shares. The sale will be complete by end of February. We will sell to investors with the companys interest at heart and who will be able to work with

our partnersin Starafrica where we have an in interest in non-core business. Although this CEO did not say when the group intends to sell its shares in PG, the Imara CEO says many business models in Zimbabwe do not work. He says there is little or no synergy between subsidiaries of a company. he explains: Operationally, doing business has become considerably easier under dollarisation (this) implies that good management will quickly spot any inefficiencies in their business models and take appropriate action. Many business models in Zimbabwe simply do not work in the new dollarised and competitive environment, but managed to get by in a less competitive and inflationary environment. Such companies could well bethose whose models were built on import-substitution products. The Imara CEO believes businesses like these will be closed, sold or remodelled. Often there may be little synergy or correlation between each business, largely because group structure was a product of history, driven by former mergers or economic imperatives, says this CEO known as Legat. He therefore suggests that in companies where there is little or no synergy unbundling would make more sense to embrace. This he says, plays out well for major shareholders willing to remain invested in both businesses while allowing management of a holding company to focus on the core business of the group. It further allows management of the spun-off division to act independently. This would be the ideal step to take rather than to close down non core activities based on factors whose life span is uncertain. Internationally, the unbundling by US cigarette and food group Altria of first Kraft in 2007) and then Philip Morris

International (in 2008) had demonstrated the advantages of the approach. This will not be a new business move for local businesses. Starafrica spun off Red Star and listed it separately on ZSE. Others like African Sun and AFRe spun off Dawn Properties and Pearl Properties respectively. ZimRe Holdings also spun off its property division and listed a few years back. Legat said In Zimbabwe, exchange controls and lack of foreign exchange were such imperatives. Companies need to restructure undertake given the need for capital and skills. Zimbabwean companies with divisions that have no synergy with core business therefore need to unbundle, given that there is now use of the US dollar which is a more secure currency that has given companies leeway to raw materials and other services necessary to run businesses. And Zimbabwe is just an ideal place for group companies to unbundle a division or divisions that have little synergy with the core business of the group. But an unbundling proposal might be met with resistance by shareholders not willing to be diluted though it would be unwise for them to do so.

In conclusion , it is therefore wise to unbundle so as to run businesses efficiently while on the other hand closely following the factors which have led to a bit of stability in Zimbabwe so as to avoid being caught unaware.

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