Mergers and acquisitions in Africa: trends and driving force

In recent years, the M&A platform globally has been through challenging times because of recession and inflation, high interest rates, geopolitical challenges, and market volatility, which has led to a slump in M&A transactions.

However, there is optimism that there is a new phase of M&A on the horizon, although it is expected that new factors will be the driving force for M&A deals in Africa. 

Artificial intelligence: It is anticipated that AI will be more integrated in the M&A activity. AI will be used by buyers to identify potential targets, assist in the performance of due diligence, and track the performance of the potential targets before taking an official step to propose an acquisition. AI offers an opportunity to mine and analyse a lot of data at a fast pace and cheaply. However, AI has its challenges, and it is still critical to retain the appropriate advisers once the decision has been made to proceed with the acquisition. 

Expensive financing: Recession and inflation have made financing of deals more expensive due to high interest rates. This will have an impact on M&A transactions since buyers will likely force hard negotiations on project deals and won't likely spend more money than is essential for the acquisition.

Impact investing & ESG: The growing trend of financiers is seeing projects that don’t only focus on high financial return but generate identifiable, measurable, and beneficial social and environmental benefits. ESG stands for environmental, social, and governance and this is a critical factor that investors and M&A deal makers consider because of climate change, increasing inequality, and the need to balance business and societal needs. Companies are now required to go beyond the need to make profits by incorporating ESG factors into their investment decisions, and project implementations, and this is becoming a crucial factor in securing funding from financiers.

Increased regulatory scrutiny: Regulatory bodies from anti-trust to tax authorities will not stay on the side-lines and wait to approve transactions, rather they are expected to delve into transaction documents to understand the transaction as they are becoming more sophisticated and require more disclosures. Also, there is an increasing need to disclose the ultimate beneficial owners behind the chain of offshore entities involved in the transaction. Tax authorities are becoming more vigilant in restricting tax evasion and avoidance in structures which are meant to reduce or eliminate the payment of taxes. We see more African jurisdictions wanting to tax transactions which occur offshore leading to an indirect acquisition of assets or projects in African countries. 

Rise in small and mid-size M&A deals: While large ticket-size deals still occur, it is expected that there will be a shift towards the acquisition of small and mid-size entities which are either profitable or have a promising outcome. The main issue with small and mid-size entities, especially in our African jurisdictions e.g. Tanzania, is that there may be compliance shortcomings. However, this can resolved by retaining the services of trusted and experienced advisers in legal, regulatory, and financial to attract potential acquirers or investors. 

Increased African investors: It is without a doubt that most large and mid-size acquisitions occurring in Africa over the past decades have been by multinationals from outside of Africa and there were less Africa-based equity funds or African investors who were the acquirers in such deals. In recent times, there are more African acquirers either through Africa-based equity funds or entrepreneurs who are looking for expansion across Africa. The African Continental Free Trade Area (AfCFTA) may have played a role in this positive change, and it is expected that this trend will continue to rise as more African countries look for ways to cooperate.

Governments & private JVs: In the late 1990s and early 2000s, most African countries were open to privatisation where we saw state-owned projects and assets being privatised to foreign investors with the hope that this move would bring in more FDIs in the African jurisdictions. However, for most African countries, such initiatives did not deliver the much-anticipated rewards, and some Governments resolved to re-possess the now non-performing assets/projects and there have been efforts to revive them. It is expected that there will be a revival of Governments’ portfolios in the investment platform but mainly focused on joint venture arrangements or PPPs as opposed to full privatisation. 

If you have any questions about the topics discussed in this article, please contact Amalia Lui.