South Africa’s M&A market will remain weak in the near-term, with the projected strengthening of the economy in 2020-21 likely to support a modest recovery in deal-making activity in future years. This is according to Baker McKenzie’s annual Global Transaction Forecast for South Africa, produced in conjunction with Oxford Economics. The Forecast notes that merger and acquisition value in South Africa was US$10.1 billion in 2019, but that this is expected to drop to US$5.2 billion in 2020, before rising to US$9.4 billion in 2021 and US$12 billion in 2022.
“In 2019 we have noted a trend towards a higher value but lower volume of M&A transactions due to the opportunities to capitalise on demand in certain sectors in South Africa. Despite this, the last few years have, in general, not been conducive for investment in South Africa. Investors usually do not mind a challenge, but they have no affinity for uncertainty. Concerns around corruption and South Africa’s ability to implement good policy are well known and have led to numerous calls for legislative reforms that encourage foreign investment, boost infrastructure development and improve governance and compliance. All of this is essential for South Africa to be able take its place on the global investment stage,” says Morne van der Merwe, Head of Corporate/M&A at Baker McKenzie in Johannesburg.
As such, President Cyril Ramaphosa said recently that he wanted South Africa to be destination of choice for foreign direct investment and that the aim was to attract ZAR1.2 trillion in new investment in the country over the next five years. He acknowledged that far reaching reforms were still needed to boost investment, but that steps had been taken to improve certainty in mining, oil and gas and telecommunications in order to create a more stable investment environment.
“South Africa’s predicted dip in M&A investment in 2020, however, is not just about challenging local conditions. It is also part of a global pattern – M&A activity and value are predicted to fall globally in the coming year. Global cyclical factors such as rising interest rates, higher energy costs and falling spare labour are forecasted to combine to trigger a sharper-than-expected slowdown.
Van der Merwe says that adding to the risks of investing in Africa are the recent escalating global trade tensions, such as the China-US trade war and Brexit, which could undermine the ability of companies to operate across borders. However, there are also signs that the global trade tensions are having a positive impact on South Africa, and Africa as a whole, as changing trade patterns have seen the major players turn to Africa to find new avenues for trade and investment.
“The good news is that South Africa’s commitment to improving the local investment environment, combined with signs of future economic improvement, have resulted in higher M&A value and volume predictions in South Africa in 2021 and 2022,” he notes.
IPOs will increase in coming years
There were no Initial Public Offerings (IPOs) in South Africa in 2019, but in 2020 the situation looks set to improve with US$211 million predicted to be raised in South Africa. In 2021, IPOs worth US$634.7 million are forecasted for South Africa, rising to US$912.3 million in 2022.
Wildu du Plessis, Head of Capital Markets at Baker McKenzie in South Africa explains, “Investors have been waiting for political and economic stability to return to South Africa before going ahead with any planned capital raising. Also eroding investor confidence were the numerous global trade tensions, with capital raisers watching for signs of resolution before launching IPOs. However, with an economic recovery forecasted, trade tensions easing and South Africa and Africa beginning to benefit from new global and regional trade agreements, the Forecast points to a recovery in capital markets in South Africa in the next few years.”
The Global Transactions Forecast projects that merger and acquisition value will decline globally from $2.8 trillion in 2019 to $2.1 trillion in 2020. The report predicts a downward trend in IPO proceeds from an estimated $152 billion in 2019 to $116 billion, a 23% drop.
The Forecast notes that global deal-making will experience a continued hangover in 2020 thanks to ongoing worldwide economic uncertainty and the risk of global recession. The report also reveals that the deal flow in North America is an outlier to the global trend, while technology, investor activism and private equity take centre stage in pushing transactions forward next year.
“Make no mistake — deals are getting done, but the current slowdown is inevitable considering the continuing uncertainty around trade and regulation,” said Ai Ai Wong, Chair of Baker McKenzie’s Global Transactional Group. “We know that around the world, there are many investors and companies with capital on the sidelines, waiting to move forward with domestic and cross-border deals.”
“Global IPO activity has been slow overall this year with significant political issues weighing on markets. There were bright spots, including in the domestic US market, which outperformed its 2018 totals,” said Koen Vanhaerents, Global Chair of the Capital Markets practice. “We’re in for a turbulent 2020, but the appetite is still there for capital raising, and the pipeline, particularly in North America is quite robust. There is a light at the end of the tunnel in 2021, with Brexit resolving and European economies settling into a more stable place.”
Last year’s Forecast predicted an overall slowdown of the M&A market in 2019 and into 2020, which is consistent with current expectations. However, acquisitions do remain an important growth strategy for companies worldwide, and we expect economic conditions to improve by sometime in 2021 and the forecast predicts a subsequent uptick in transaction activity.
“We’ve all seen so many of these cycles over the past 20 to 30 years,” said Ai Ai Wong. “Although markets today are driven by different forces, especially by the influence of technology, we cannot escape the ebbs and flows of markets and the interconnectedness of the world’s economies.”