Thriving in M&A: Insights and Strategies for Success Amid Economic Shifts

The insights from these seasoned dealmakers underscore the importance of adaptability, innovation, and thorough preparation in navigating the complexities of dealmaking in South and Sub-Saharan Africa. By leveraging creative deal structures, conducting rigorous due diligence, understanding macroeconomic and regulatory dynamics, and focusing on resilient sectors, dealmakers can successfully navigate challenges and seize opportunities in this dynamic market.

Tell us a bit about your career in M&A so far.
My journey in corporate finance has been fantastic. I started in investment banking in London and relocated back to South Africa just before the World Cup. I’ve always been attracted to mergers and acquisitions, which are at the cutting edge of investment banking. It’s a role that requires both analytical and financial skills and a significant level of creativity. I’ve been in this role for 14 years, and it’s been a dynamic and constantly evolving journey.

It is indeed a field that offers great purpose, given its role in corporate and economic growth. Given the current macroeconomic factors, with inflation being stickier than expected and rate cuts being delayed, what are your expectations on the macro front? When might we see the cost of capital improve and boost confidence for dealmakers?
Inflation has been sticky, driven by various external factors. The US is probably leading the disinflation benchmark. South Africa will likely follow a similar path to the Fed’s rate cuts. There are still risks to the upside, as our governor has pointed out. From a deal-making perspective, the higher cost of capital means M&A is more costly. However, we’ve seen a softening of multiples in the equity markets and the dealmaker space. Outlook and growth potential are key. We’ve seen some improvement in load shedding, and the election was an overhang on confidence. Investors have been waiting and seeing, but we are optimistic about improvements in the coming quarters.

That’s encouraging. Do you expect a more robust second half of the year? Are there particular sectors that might stand out for M&A resilience or attractiveness?
Deal making will be selective, but we’re seeing a push for offshore acquisitions among large corporates for diversification and transformative deals. Mid-sized and smaller corporates remain focused on South Africa, looking for acquisition opportunities to diversify product lines or geographies. They are cautious but have a mandate to create shareholder value. In an economy that feels ex-growth like South Africa, earnings growth through acquisition becomes more appealing.

Given that, which sectors do you see as attractive?
My focus is on industrials and financial services. The industrial space has been challenging due to load shedding, but as that improves, we expect the manufacturing front to improve. In financial services, there’s been reasonable flow and activity, driven by international corporates reassessing their footprints and making strategic exits. There are opportunities from international divestments, and we work closely with companies seeking growth capital. Financial services in South Africa are well- developed and can compete internationally, offering growth and opportunity despite the country’s challenges.

What do you see as the major risks or challenges for dealmakers for the remainder of the year?
Confidence is key. M&A involves permanent investments, so investors must be certain about the geography they are investing in. Economic growth prospects and outlook are crucial. Positive reforms and stimulus could unlock M&A opportunities. South African corporates have significant cash reserves, so creating an environment conducive to investment is essential for yielding returns and unlocking economic growth.

How are dealmakers getting creative with deal structures to close deals in this environment? Are there valuation gaps in the market, or have they narrowed?
Valuation gaps have narrowed to some extent, but good businesses can still attract premium multiples. Sellers often have an optimistic view, while buyers
are more cautious. Negotiating and narrowing this gap is crucial. Deferred payments are common, where a buyer agrees to an upfront payment and defers a portion based on the company’s future performance. And what I mean by that is a buyer will make an offer based on his due diligence of a company and view in terms of how a business can perform, but the buyer will also lean on the management team and their capability in terms of forecasting performance.
Often what a buyer will do is agree to a certain upfront payment of, for instance, 80% of the purchase price, with a residual amount of 20% being deferred a year down the line subject to a company meeting certain profit or earnings metrics. This aligns with earnouts we see in the market.

Do you think we’ll see more spin-offs, given what we saw with We Buy Cars and Transaction Capital, and companies like Anglo considering spinning out assets?
In the short term, yes. The interest rate environment drives this. Companies with strong balance sheets can sustain high interest rates, while those with higher debt levels reassess their operations and divest non-core assets to reduce debt. This can be challenging as they might sell in a less favourable environment, but corporate advisors help unlock value and maximize purchase prices.

How is the due diligence process evolving, given the increased market uncertainty and the need for thorough assessments?
Due diligence has become more thorough and intense. It goes without saying that when you’re operating in an environment where there is uncertainty, buyers would naturally take a much more cautious and prudent approach in terms of performing their due diligence.
Another point we’re also seeing is often buyers are looking at doing commercial, or market due diligence. So they actually look to dive into the market dynamics around a business and on that understand a business’s forecast in the context of how the market is growing. So there has been an increase in terms of depth of due diligence that buyers perform.
Another aspect we see is an increase in the number of what we call vendor due diligence. And that’s effectively a due diligence which is performed by the seller on themselves, and the view to that is to firstly provide the prospective buyer of a business with much more insights into the business earlier on at a faster pace, and hopefully that provides faster and more crystallized price discovery.
The one part with the due diligence is that buyers often revise their price based on their findings. So, in going through an acquisition process, early on in the phase, they will very much base an offer on what they know about the market, but also in terms of the forecast that a company provides them. When they move through the due diligence process, they are then able to scrutinize what are the assumptions underlying those forecasts are, and often those get moderated through the process. Or if they find some skeletons in the closet, for lack of a better phrase, that can also often either result in a price adjustment or some type of legal mechanism which looks to mitigate the risk.

Given this, what steps are being taken to streamline the due diligence process, given the advancements in technology and AI?
The move to virtual data rooms has been significant. These online repositories allow for efficient and global access to information. They facilitate fast and engaging processes with Q&A capabilities and AI tools. Legal firms use AI to review agreements, and data providers offer scorecards to identify information gaps. This preparation enables buyers to work through data quickly and engage with sellers more fluidly.

Regulatory impacts have been a major challenge in South Africa, particularly with the competition authorities. What are your expectations for regulatory challenges for the rest of the year?
Regulatory challenges are at the forefront for dealmakers. It’s now something we structure for upfront, creating solutions for regulatory interests. Deals often take longer, but being aware of these challenges from the beginning makes them manageable. I expect regulation to increase over time, but dealmakers must be quick on their feet to adjust.

Final question. If you were to single out one key ingredient for getting a deal over the line in this environment, what would it be?
For me the most fundamental aspect to closing transactions is building up momentum. I think any deal which staggers along often in my experience doesn’t close. If I look at my experience the deals where we’ve had two parties around the table who are intent on doing a deal
on the buy side and on the sell side and move quickly and together in terms of consummating that deal firstly improves the deal experience on all fronts substantially but also building up momentum keeps everyone working towards the end goal a lot quicker and it often yields a positive result.
In terms of the deals that I’ve worked on and with my colleagues, that is normally one of the key aspects we look to drive from an early stage and that also comes through in terms of how you design your transaction process, how you engage with bidders, how you engage with sellers, how you look to actually project manage the transaction going forward.