The number of mergers and acquisitions (M&A) in South Africa decreased by 61% in value and 38% in volume in 2009, compared with figures for 2008. Independent M&A intelligence service Mergermarket reports that it will be a while before the volume of deals achieved in 2007/8 is reached.

“Indications are that local M&A activity will remain relatively slow for most of this year for most sectors and will probably only start to pick up in early 2011,” says actionable intelligence service dealReporter’s South Africa bureau chief Thomas McLachlan. dealReporter is part of the Mergermarket group.
In spite of what he says, the evidence of an uptick in M&A activity is already starting to show.

“While banks’ earnings indicated a tough year last year owing largely to consumers defaulting on their debt, there appears to be a desire, once again, from banks to increase their corporate finance activities to perhaps offset this,” says McLachlan.

To break the aftershock that many smaller companies might still be experiencing, as a result of the recession, it is important for a few large deals to close this year.

With only 91 deals, valued at just over $6,7-billion, secured last year, 2008 was a better-performing year with 146 deals achieved at a value of about $17,3-billion.

“Like the rest of the world, South Africa felt the effects of 2009’s global economic reces- sion. Banks tightened their credit, which meant that com- panies would have to rely on their own balance sheets to make acquisitions. However, most companies felt the need for a cash buffer in case the situation worsened, so they opted not to make large acquisitions,” says McLachlan.

Companies in the energy and mining industries and utilities took the largest slice of last year’s M&A action, with 30% of the deals. Following closely was the financial services industry with 24,1%, and third was real estate with 18,9%.

Although deal volumes were flat last year, reflecting the global trend, consolidation in the resources sector has been ongoing for some time, and remained constant during this time. Therefore, with last year’s recession resulting in a decrease in asset prices, this provided companies with the space to make opportunistic acquisitions.

McLachlan says that South Africa’s financial services sector has also been reasonably well shielded from the global crisis and that it makes sense that it remained fairly active over the period.

When local companies decide to merge with companies outside the country, it greatly depends on the company and its growth strategy.

“For example, cellular network operator MTN announced last year that it was seeking a merger with India’s Bharti Airtel. This was a move to ensure growth for the telecommunications group in emerging markets, which, in turn, creates value for shareholders.”

Also, for other sectors, there may be an attraction in the lower prices currently being found over- seas. However, McLachlan says that Mergermarket is already starting to see asset prices normalise and, hence, this type of opportunistic buying is not likely to be as active as was expected.

He says that foreign companies wanting exposure to fast-growing emerging markets on the African continent, rather than South African companies wanting to relocate or grow operations outside the country, often drive cross-border deals in South Africa.

Further, McLachlan says: “There has been an indication that the South African government is becoming increasingly tough on foreign companies that acquire local companies, particularly the larger, more prized local companies.”

He explains that, while there may not be direct disadvantages to undertaking cross-border deals, there is a worry that it may become more difficult to obtain the South African government’s blessing.

In terms of companies listed on the JSE, he says that South African shareholders are very much aware of how valuable the companies in which they invest are, and are unlikely to give up their shares without a hefty premium from the bidding company.