Why M&A activity in SA fell off a cliff in first half of 2018
Despite a global boom in M&A activity, it has all but ground to a halt in SA due largely to fears about political risk
Mergers & acquisitions (M&A) in SA and Africa as a whole in the first half of 2018 have fallen off a cliff, despite an explosion in global M&A activity in the same period. Political uncertainty is the main cause, according to practitioners.
In SA, year-to-date figures from Thompson Reuters show 200 deals have taken place — about half the figure for the first half of last year and the lowest in a decade.
The value of deals also halved, falling to a 10-year low.
Deals have declined across the board, with inbound, outbound and domestic transactions all well down on last year on both a volume and value basis.
As SA is a small market, the numbers can be misleading because large deals often skew the picture. But the surprising thing about SA’s decline this year is that it comes at a time when global M&A activity is booming.
Clem Daniel, director at Cliffe Dekker Hofmeyr, says that on the one hand we are seeing positive development, in the form of the ANC trying to isolate questionable members from holding public office and the implementation of a state capture commission of enquiry. "On the other hand, domestic issues such as the unease and uncertainties around expropriation without compensation and the sheer amount of effort needed to put the SA economy back on track are almost certainly [hampering] deal activity," he says.
Globally, growing trade protectionism from the US, the situation in relation to Turkey, our own alignment within Brics and our exposure under the African Growth Opportunity Act are also added pressures in a tough environment, says Daniel.
Data from Deals Intelligence, a Thomson Reuters division, shows global cross-border M&A activity is at an 11-year high of $1.2-trillion in deals, up 74% on the same period last year. This is about the same as the figure in 2007, which was considered a bonanza year for the industry.
The 2018 figure is roughly the same as the entire volume of deals done last year.
The story in the rest of Africa has largely mirrored that of SA. Total deal volumes and values fell sharply in the first half of 2018, declining 44% in volume terms and 57% in aggregate value, compared with the first half of 2017.
Morné van der Merwe, managing partner and head of the corporate/M&A practice at law firm Baker McKenzie, says the main problem in SA is that the country simply doesn’t have a sign up that says "open for business".
Van der Merwe acknowledges that the numbers can be misleading because M&A deals often take years to complete, but he says the decline is the consequence of a remarkable drop in market confidence.
He tells of getting a call recently from Chinese colleagues who were looking for clarity on local newspaper reports that SA has become a risky investment destination. Though South Africans are used to hearing this narrative from Europe and the US, to have the issue come up in the Chinese media is something new, Van der Merwe says.
Conventional wisdom previously held that SA had complications, but they were still manageable. Now SA is seen as definitely high risk.
The information flow has not all been one-way. Van der Merwe says the Brics summit in Sandton was a positive, particularly the undertaking from member countries — Brazil, Russia, India, China and SA — to invest more.
But land reform issues, constitutional changes, bribery and corruption are all driving up perceptions of uncertainty and unpredictability in the business environment.
The fact that the business climate is not responding to political changes in SA is a surprise, as there was hope that the new administration would improve the way in which the country is run.
But van der Merwe says the signals are mixed. The one area in which there is a lot of activity — currently below the radar — is offshore acquisitions. "Blue chips are all hunting in the offshore markets, but the weak rand makes it harder," he says.
"It becomes very difficult to acquire hard-currency assets with a soft currency."
Some companies are trying to get around this problem and access deeper pools of capital with cross-border listings.
The financial services sector is still quite active, but even investment from SA into Africa is down.
Van der Merwe says the reasons for the decline in M&A activity in Africa are much the same as for SA, with one addition: strict antibribery and anticorruption laws in some investor countries, such as the US and the UK, have made investors more cautious.