M&A activity in South Africa is down but acquirers are not out

Deal Leaders Africa's Andrew Bahlmann is optimistic about investment prospects.

Although dealmakers are reporting a marked slowdown in mergers & acquisitions (M&A) in South Africa so far this year as economic and political uncertainty hangs over investment prospects, cash-flush acquirers are still on the hunt for deals. 

Andrew Bahlmann (pictured), the MD of corporate finance advisory firm Deal Leaders Africa, has noticed a considerable slowdown in South Africa’s M&A activity from domestic and international acquirers since 2017.

Lending credence to his observations are figures from Thompson Reuters, which shows that about 200 deals have taken place in the year to August 2018 – the lowest in about a decade. The days of heightened deal flow – of at least more than 400 deals achieved every year last seen in 2015 and 2016 – seem to be long gone.

You don’t have to look far for reasons behind this. Political uncertainty and a struggling economy that is expected to grow by 0.8 percent are the main causes.

But the slowdown in M&A activity isn’t necessarily bad news.

“Tough economic times put more pressure on companies to acquire businesses than not because their own organic growth performance isn’t showing up. In this environment, companies would choose to buy growth,” Andrew told M&A Africa.

In other words, he believes that M&A activity will soon be boosted by companies wanting to achieve growth that is acquisitive in nature.

Andrew is a highly-experienced chartered accountant who is close to dealmaking circles, as Deal Leaders Africa links businesses (clients) with a turnover of more than R30 million to potential buyers. Business owners would approach Deal Leaders Africa if they are exiting their operations in full or want to find an equity partner.

Although Andrew believes that deals are down across the board – inbound, outbound and domestic transactions – the entire M&A community is not yet out.

“There are a lot of acquirers out there and it’s a buyers’ market. There is still a lot of cash on company balance sheets, but companies are using that as a buffer against tough trading conditions. There is also a shortage of good businesses to sell or for acquirers to invest in. We see it in the slowdown in the number of businesses approaching us and wanting to sell their businesses,” he said.

Beyond the shortage of promising businesses to sell, Andrew said all that domestic and international investors want is certainty on policy. Once this is achieved, it might spur M&A activity back to heightened levels seen in 2015 and 2016.

International investors still view South Africa as an entry point into sub-Saharan Africa given the country’s stable financial markets, infrastructure, and government.

And the Africa rising narrative of the continent’s young population and industries that are ripe for disruption is still piquing the interest of international investors.

“It doesn’t matter whether it’s in South Africa, Rwanda, or Ethiopia, there are opportunities. If you are an international acquirer, you cannot dispute the Africa rising narrative and growth opportunities that come with it. International investors are coming to Africa because their own countries have issues like Brexit and concerns around Donald Trump.”

Deal Leaders Africa’s approach to deals

The big question is how Deal Leaders Africa is getting through a tough market, whereby acquirers are aplenty but there is a dearth of good acquisition opportunities.

The number one skill that a dealmaker requires, in the event of being involved in a good business, is emotional quotient than intelligence quotient, said Andrew.

“The days of bullying and hard-core negotiations during a deal are gone. You must know how to manage different personalities and sensitives. You must have the ability to put yourself in other people’s shoes. Sure, you can be tough and decisive at the right time but because dealmaking can be an emotional rollercoaster for the client.”

Unlike its peers, Deal Leaders Africa has a different approach to maximising a transaction value for a client.  For starters, it sources multiple acquirers, as much as 40 to 100 potential domestic and international acquirers, for a client.

“People might think this is overkill but, in our experience, you really have to cast the net wide. We do extensive work to create a market for our sellers and we go through a system to bring multiple parties to the table.”

In controlling a deal, Deal Leaders Africa doesn’t take the purchase price or transaction value of the seller to the market.

“Unlike the JSE-listed space, the privately-owned business space has no defined market. Thus, valuations are subjective. If private companies had their financial statements out there, then there would be a debate about financial assumptions.”

“We go to the market and allow the market to price our client. Ultimately, a value is driven by what people are prepared to pay,” said Andrew.

At heart, Andrew is passionate about entrepreneurship. After all, he is an entrepreneur, having run his own tourism business for six years while completing a CA degree and articles, and forming a consultancy that advised entrepreneurs on building their businesses.

He has ambitions of building a private equity unit within Deal Leaders Africa that will focus on investing in medium-to-large-sized businesses.

Asked by M&A Africa about the biggest lesson he learned about running businesses, Andrew said: “everything in business revolves around building relationships.”

It’s this philosophy on relationships he uses today to source clients.