One of the key indicators of how a country’s economy is performing is the mergers and acquisitions (M&A) activity in its corporate market.
In South Africa, though, local knowledge will give you a surprisingly different picture from the external view.
Tracking M&A transactions in terms of direct foreign investment over the past few years in South African companies reflects what we are all experiencing in the current, very challenging local economy.
Figures from global law firm Baker McKenzie, in conjunction with Oxford Economics, show that in 2018 South African M&A transactions plummeted by nearly half – 42.6% – to only $4.3 billion.
This was in contrast to $7.5 billion worth of deals concluded in 2017.
It also echoes the cautionary feedback South Africa receives from major international ratings agencies, including most recently from the long-time bullish Moody’s.
The good news, though, is that the 2019 activity is expected to rebound by at least 44% to $6.2 billion in 2019.
This may improve even more given the recent upbeat South Africa business confidence index for April, which rose 1.9 points to 93.7 compared to March, showing that business was preparing for more stability and productivity following the elections.
But what does this M&A activity actually mean for privately owned businesses in the market?
Focusing on businesses that generate turnovers between R150 million and R800 million, we’ve seen a number of trends that are counter-intuitive to the general market trends.
At Deal Leaders Africa (DLA), a niche corporate financial adviser working only with business owners, we currently have more than 40 transactions in play and we have engaged with more than 2 000 potential or actual acquirers over the past 18 months.
Based on these numbers and the quality and average size of our clients, we have never had a better pipeline of transactions over our previous six years of operations.
And don’t jump to the conclusion that our clients are selling to bail on South Africa. Instead, it is pragmatic succession planning.
About two thirds of our clients are selling their businesses either because they are approaching retirement age or they want to liquidate their assets for retirement purposes.
Many also don’t have the next generation of family wanting to take over the business.
Another significant proportion is looking for empowerment partners to capitalise and grow their businesses.
In reality, most of our M&A transactions are about reinvestment and business owners staying in South Africa.
Based on this experience, here are my five reasons why this lively M&A activity is a good barometer for the economy:
1. There is M&A activity in multiple industries. At DLA we cover a broad array of industries and we are, of course, aware of pressure in the likes of construction, general engineering and retail.
This was borne out by the rise in the first-quarter unemployment statistics to 27.6%, driven particularly by 142 000 job losses in construction, although also by about 94 000 in finance and business services and 50 000 in community and social services.
Despite that grim picture, we currently have clients who are bucking the trend in their sector and having record years. One of our specialised construction clients, for instance, had a turnover of R194 million pa that has grown 44.6% over the past year.
Similarly, we had a retail client with an annual turnover of R354 million, turnover growth of about 15% and earnings before interest, tax, depreciation and amortisation (EBITDA) growth above 50%. Performances like these make any business very attractive to the acquirer market.
It also allows us to position such clients with potential acquirers in a way that demonstrates business opportunity and synergy.
2. Is there really “blood in the water” out there? My answer is yes and no.
Trading conditions are extremely tough and pressure is mounting on all fronts for the average business owner.
However, because we are seeing clients’ businesses achieving record results, this makes them extremely attractive to the acquirer market.
ICT, industrial, pharma/medical and services industries are all currently highly desirable in the M&A market.
What makes a business desirable varies depending on its fundamentals and the needs of the acquirer.
We can be successful concluding a deal for an ICT company that has an annual turnover of more than R150 million, with turnover growth of close to 80% and EBITDA growth of 246%.
We can conclude an equally successful deal for another ICT business that has annual turnover of more than R500 million but lower turnover and EBITDA growth.
In this case, almost 25% turnover growth and EBITDA growth of more than double that.
3. International acquirers haven’t turned their back on South Africa. Having engaged with hundreds of international acquirers, it is clear to me that the vast majority are not steering away from South Africa. Rather, they are in survival mode based on their own operational and strategic pressures.
As South Africans, we often forget that there are challenges in every market and what we are seeing here must be taken within the context of the global markets.
There are millions of active acquirers out there. You never know who will invest or acquire until you have engaged the market and know their strategy.
A previous client of ours was sold to a Danish acquirer who subsequently bought their next business in Brazil, just after the Brazilian economy collapsed in 2015/2016.
If they had been concentrating on the “junk status” of the Brazilian economy and market statistics in isolation, instead of getting the facts from the actual market, they would have seen some very negative and incorrect views and statistics – and have lost out on the deal.
4. South Africa business owners are pessimistic as hell – but also exceptionally resilient.
I see this resilience in our clients and their ability to weather storms and build amazing businesses that are extremely attractive to the acquirer market.
Many of the larger acquirer businesses are looking for ways to grow. Faced with stagnant or even negative organic growth, these acquirers need to invest in smaller, more profitable businesses to grow.
This is when they look to privately owned businesses that usually have the benefit of agility and are able to adapt to changing markets.
5. Don’t write off South African acquirers. Clients are often attracted to our services based on our international reach and ability to find foreign acquirers – but, as we point out to them, they are at least as likely to find the real pots of gold here in South Africa.
Nine out of 10 of the acquisitions we conclude go to South African-based acquirers.
This is often thanks to competitive pricing and cultural fit – especially as integrating and working with foreign cultures is extremely difficult and can often ruin a great transaction.
The road ahead is challenging with a number of bumps as we navigate the volatile economic and political landscape ahead.
But there is a road. It may not be a perfect autobahn but it is the only road we have. We see it as over-taxed, unattractive and full of potholes.
Ironically, acquirers may see it in a very different light when taking a 10-year view on this part of the world.
Where we see a pothole every 10 metres, they may see nine metres of solid road.
We need to remind ourselves of this and make sure that we focus on the nine metres of opportunity – not on the potholes.
• Andrew Bahlmann is managing director of Deal Leaders Africa.