Political turbulence and economic uncertainty are becoming the new normal for deal makers; however, the impact on global mergers and acquisitions (M&A) activity has not been as steep as many expected, multinational law firm Baker McKenzie's Cross-Border M&A Index has shown.
It noted that while M&A activity had dropped in Africa since the last quarter of 2016, the continent still held “massive” opportunities for M&A investment. Africa saw 14 outbound cross-border transactions worth $704-million and 29 inbound cross-border deals, totalling $6.2-billion.
The deal values also dropped in comparison to the last quarter of 2016, where there were 11 outbound cross-border deals in Africa, worth $4.6-billion and 22 inbound M&A transactions, worth $11.4-billion.
Baker McKenzie South Africa co-managing partner Morne van der Merwe added that, while the country played a major role as an investment hub for Africa, it shared this role with other strong African economies, including Nigeria. “Both South Africa and Nigeria are currently facing currency woes and the trickle-down effects of the Chinese slowdown.
“In addition, the recent Standard & Poor’s and Fitch agency downgrades in South Africa’s credit status are expected to have a negative impact on the perception of South Africa being an entry point into the continent and as a destination for medium- to low-risk developing market investment. As almost half the continent’s M&A activity flows through South Africa, the downgrades will no doubt have a negative knock-on effect in Africa as well, unless the country’s standing as a stable economy can be maintained.
“On the plus side, the rand has shown [itself] to be far more resilient than most expected and, after a period of sell-offs and volatility, there is hope for a normalisation of the economic environment and a rally of business to restore investor confidence. This may create massive opportunities for acquisitions, and a shift in deal financing and buying patterns, to take advantage of the volatility,” said Van der Merwe.
Meanwhile, the index showed that North America contributed the bulk of inbound investment into Africa in the first quarter of 2017, with investments valued at $4.1-billion.
“North American investment in Africa has traditionally been directed towards the exportation and establishment of global brands to satisfy the demand of a growing consumer market, as well as in the energy, oil and gas, healthcare and pharmaceutical sectors. Owing to the opportunities the African economy presents in these sectors, this trend is likely to continue. Whether US President Donald Trump’s policies will directly influence this is difficult to predict at this juncture,” he explained.
Van der Merwe noted that the interest displayed by bidders targeting African investments should and could be higher than the amount reflected in the index – $6.1-billion a quarter.
“There are many untapped opportunities for attracting foreign direct investment, which the South African government has acknowledged. In the 2017 Budget speech by [then] Finance Minister Pravin Gordhan, it was indicated that the relaxation of several foreign exchange controls and tax penalties may be implemented to allow for South Africa to be more agile regarding inflows and outflows of capital, whilst still protecting its currency reserves.
“The Middle East and the European Union (EU) are specific areas where Africa could substantively increase its attractiveness as an investment destination. According to the report, bidders in the Middle East invested only $7-million in Africa in the first quarter of 2017 and investors from the EU spent $48-million in Africa in the same time frame,” he said.
The report showed that African outbound investment was mostly concentrated in EU countries, with $625-million flowing from Africa to the EU in the first quarter of 2017.