When the dust settled on a whirlwind 2008, Thomson Reuters reported that global mergers and acquisitions volumes had contracted to $2.9-trillion, 30% shy of the record
posted in 2007.
In South Africa transaction volumes slipped almost 40% year on year, from R514-billion in 2007 to just R312-billion last year. The main reason for the decline is no surprise.
According to the Mc-Kinsey Quarterly, economic downturns are usually accompanied by ‘steep declines in the value of global mergers and acquisitions activity — often 50% in the first year”.
Other reasons for the slowdown include lower deal values because of falling share prices, difficulties in raising finance and generally poor economic sentiment.
David Thayser, director for transaction and advisory services at Ernst & Young, believes that the domestic slump is in line with the economic cycle. But the slowdown has been exacerbated by a mismatch between buyers and sellers.
Wils Raubenheimer, director of corporate finance at audit, tax and advisory firm Mazars Moores Rowland, said that potential buyers were stranded because sellers had gone to ground.
Sell-side decision-making is dominated by concerns about selling shareholders’ interests short. ‘Our problem is finding appropriate sellers, not the other way around,” said Raubenheimer. Private equity participation in mergers and acquisitions activity has been hampered by the inability of funds to survive falling asset valuations and tighter credit.
In the absence of such deals attention will turn to ‘corporations that need to look carefully at balance sheets”, said James Formby, head of corporate finance at Rand Merchant Bank. He expects increased activity in capital raising and the disposal of unnecessary assets as corporations focus on their core strengths.
Share swaps will probably emerge as preferred fulfilment mechanisms to accommodate market volatility and capital shortages. BEE deal structures have come under pressure too.
Sugan Palanee, head of BEE at Ernst & Young, noted that declining dividend flow and high levels of debt among BEE partners contribute to the problem. The result is that company executives are turning from equity-based solutions to more traditional empowerment pillars.
But analysts say that South Africa should experience an increase in mergers and acquisitions activity in the second half of this year.
Ursula van Eck, a director of audit and accounting at BDO Spencer Steward, expects the ‘sharp increase” in deals in the Australian mining industry to spill over to South Africa.
Van Eck said that Asia and China hold the key to short-term revival. ‘We are monitoring what happens in the economies of the three biggest investors in African mining (Canada, China and Australia) — two of which are showing strong signs of recovery,” she said.
The world’s largest diversified resources companies are on the prowl for value opportunities, including smaller outfits that are battling to stay afloat. Proposed mega-mergers should underpin domestic volumes too.
Talks between Indian-based Bharti Airtel and MTN Limited are well advanced, whereas London-listed Xstrata is keen to force a transaction with Anglo American.
Despite the decline in mergers and acquisitions activity, McKinsey notes that 2008 volumes were the third-highest on record. They expect the traditional boom-bust cycle will be turned on its head in the next 12 to 24 months.
Activity is already on the up because of the increasing contribution of cross-border transactions, the metamorphosis of the so-called mega deal from ‘rescue restructure” to large-scale transformation, the return to realistic market valuations and the steady recovery of private equity players.
But the real driver for activity in the next two years will be economic regeneration.