ANDREW BAHLMANN: What Russian invasion of Ukraine portends for SA M&A

Even before Russia’s invasion of Ukraine it didn’t seem possible that 2022 could exceed or even match the heady level of merger and acquisition (M&A) activity of 2021. War on European soil seems almost certain to have a further impact.

While our sympathies are extended to the Ukrainian people, realistic business people have to become alert to the unfortunate fact that uncertainty is a part of present-day life — and even more uncertainty induced by media coverage is probably the norm.

Russia’s invasion of Ukraine carries huge risks for M&A activity in a world economy that’s yet to fully recover from the pandemic shock — or understand the full severity of the Ukrainian war. While it may cause a blip for deals actually involving Russia or Ukraine, I believe the long-term effect will be to persuade more companies of the need to diversify their risk through joining a larger group.

In a globalised, social media-connected world there is the constant threat of uncertainty and market destabilisation. Covid-19 and Ukraine are only the latest — who knows, China might invade Taiwan next if it sees Russia getting away with it. In this environment business owners need to accept that uncertainty is becoming a permanent risk, and they should consider mitigating those risks in their own planning and strategies.

This can best be accomplished by having a “big brother” on board or taking wealth out of their business and investing in more risk-averse personal balance sheets. Already the pandemic has left the global economy with two points of vulnerability — high inflation and jittery financial markets. The aftershocks of the invasion could easily worsen both.

The Russia-Ukraine conflict is expected to affect the completion of announced or planned cross-border M&A deals involving targets based in Russia or Ukraine. The fate of these deals is now in limbo as completion of some of these is likely to be delayed or called off.

The deal-making fundamentals remain unconducive for foreign acquirers at least for the near future, as no buyer likes uncertainty and market volatility, and I expect more M&A plans will get shelved until the situation improves.

Our clients are a mix of global businesses looking to enter the local market and local businesses that are for one reason or another looking to sell a stake. Yet the underlying trends in M&A as far as they affect SA — and much of the rest of the world — remain unchanged for the moment in terms of credit availability, the availability of capital on the part of financial sponsors such as private equity to deploy, and the desire to use M&A to drive business strategy and transformation. That is all still in place.

We do not really expect that to let up. I do think these headwinds from the geopolitical environment, volatility and Competition Commission can certainly have an impact. But we’re not seeing any let-up now. On the contrary, in our discussions with clients and potential clients we’re detecting a nervousness about increasing and unrelenting financial volatility prompted by one international crisis after another — and they are expressing the desire to reduce geopolitical and sector risks.

Looked at from the perspective of many of our local clients, they have dedicated their lives to building a business from the ground up, only to see it potentially devastated by global events entirely beyond their control. We saw the pandemic overnight completely alter the landscape upon which a business was painstakingly built. This is too much of an arbitrary risk for a single business. Many more business owners will be looking for security with larger, international partners.

If they’re wise, they’ll be looking for M&A to drive transformation, to promote enhanced resilience in coming out of a two-year pandemic and into a war environment where business models are really being tested. There are also several cases where larger publicly traded corporates are not getting the valuations they want, and we’re seeing corporate carve-outs as they look to spin off or just get rid of businesses that might have more value in private markets.

In times of uncertainty many businesses are going to be undervalued. They will be looking at their core businesses and their areas of strength and responding to this environment to reinforce growth areas and their fundamentals or core businesses. There will be heightened interest in some of those spin outs. I believe once this latest event in Ukraine has passed (as it will) we will see increased M&A there as buyers return to that part of the world and identify undervalued assets.

In conclusion, my take on events is that just as we saw heightened M&A activity after the pandemic, yet more people will now awaken to the need for powerful backers, and we will see more activity for financial sponsors to deploy their capital and transact.

• Bahlmann is CEO at corporate advisory Deal Leaders International.