Mergers and acquisitions in Africa: transaction predictions

Mergers and acquisitions (M&A) transactions are still at a low point although there is an expectation of a gradual rise in the second part of 2024. It is not yet clear if transactions will hit a record high as pre-Covid. Inflation rates are decreasing and banks, financiers, and investors are open to M&A deals although large ticket sizes are not as common, and closing for most deals takes longer than usual. A valuation gap between the seller and buyers continues to persist so creative M&A deal options come into play, buyers insist on strict due diligence and regulatory compliance, and ESG due diligence is core for large ticket-size M&A deals. 

Is there hesitancy to enter into M&A deals by the key players?

The key players in M&A deals are banks, financial institutions, private and public equity funds, angel investors, listed and private companies, and venture capital firms. Overall, it does not appear that the key players in M&A deals are holding back on investing in, selling, or purchasing equity and/or other assets. In these unpredictable times, discussions and negotiations for M&A deals are ongoing but the major fallout is on the valuation gap. When the buyer accepts the presented valuation report and the seller accepts to discount the purchase price, a deal can still happen. De-investing and acquisition of a non-performing asset or a line of business is still the best way to expand and diversify a company’s business portfolio. The market is still ripe and motivated to enter into M&A deals. When M&A takes an upward turn, there will be lots of deals lined up that were not a priority during the low phase. 

How does inflation and high interest rates affect M&A deals?

Overall inflation has been in existence for decades and continues to rise over the years, with regular up and downward fluctuations. Currently, the inflation rates are reducing but it does not mean that inflation will disappear completely. Inflation has been part of M&A deals for years, and this time it is not an exception. Deals can still be implemented taking into account inflations and fluctuation of currencies. Banks and financial institutions have raised their interest rates to carb the inflation rates and this has overall played a major role in the slump of M&A deals post Covid but, the market has now adapted to the new interest rates and dealmakers are working with what the market is offering to push M&A deals to the finish line. Inflation and high interest rates inevitably affect the seller’s and buyer’s expectations and cause the valuation gap but parties can still negotiate and reach an agreement by adopting a deal structure that is satisfactory to both parties. 

What are the main roadblocks for M&A deals?

Price

Buyers are cautious and are not willing to pay in excess and sellers have a higher expectation based on their internal assessment of the asset value. Although other factors like finance play a role, there are a myriad of financiers willing to invest in projects (through loans, equity, etc.) therefore finance is not always an issue but attaining an agreed value of the asset is the major challenge. It is rare for the parties involved to agree strictly based on the valuation report presented but parties, especially if they have a historical relationship can adopt the valuation presented with edits acceptable to both parties. 

Compliance

Dealmakers are sensitive to compliance requirements and any incompliance may lead to the deal breakdown. It was common in past years to either have long top dates to allow the selling party to cure in-compliance, or issue waivers to allow closing notwithstanding the in-compliance raised during the due diligence exercise.  In recent times dealmakers push for compliance before closing even on matters which may appear to be insignificant and do not go to the core of the deal. One way to cure this is to initiate vendor due diligence and save time during the buyer due diligence exercise.  

Change

The market is unpredictable with regular global and regional changes fuelled by political, economic and environment changes. There can occur significant changes from the signature of the term sheet, through due diligence to closing and these changes are fast-paced. Deal makers should anticipate and factor in such instability and unpredictability and assess how they may impact the deal and parties should be flexible on their terms to facilitate closing despite changes. 

What M&A structures should be adopted during this time?

Diversification of risk is important. Currently, sole large ticket-size acquisitions are rare and this may extend for another year or so. Instead of doing sole large ticket-size transactions, there can be a diversification of risk where multiple parties e.g.  private equity (PE) firms come together to acquire a portion of the asset and remain under joint ownership until a suitable time for exit. Also, retention of the original owner, even if as a minority is better than an immediate complete exit of the previous owner. It allows the relevant parties to co-share the risks by joint buy-in and utilise the knowledge and experience of the selling party until the stabilisation of the market allowing the complete exit of the previous owner with a final pay payable at a later date i.e. on its exit. Note, not all acquisitions need to be on a cash basis and hybrid structures can be adopted as a hybrid of cash, equity and/or swap of assets.. In addition, earnouts are becoming common, and at times deferred agreed payment of the final instalment depending on happening of specific factors. 

What about  environmental, social and governance (ESG)?

This is no longer a ‘nice have’ but it is becoming mandatory in most deals financed and undertaken by international banks, financial institutions, PE firms, etc. Although it is still at low rates, some deals collapse because part of the ESG aspects are not implemented by the selling party. ESG due diligence is becoming common aside from the standard legal, accounting, business, and tax due diligence. Any shortcomings identified during the ESG due diligence may have significant cost implications and lead to the overall slump of the price to the detriment of the seller. Whilst regions with developed countries have incorporated ESG in M&A deals early on, these regions are seeing the imposition of stringent requirements to ensure higher and wider ESG requirements. On the other side, most African countries are catching on and some jurisdictions are now enacting laws to make ESG mandatory compliance by businesses. M&A advisers are expected to work in collaboration with companies that specialize in ESG compliance to offer better services during the due diligence exercise. 

Is Cyber Security a material part of M&A deals?

All key players in M&A deals are more cautious about the risks of cyber-attacks during M&A deals. Parties tend to sign non-disclosure agreements (NDAs) to protect the proprietary information during the due diligence process, but with the AI technology being used in due diligence exercises and overall deal process, there is a significant risk of cyber-attack especially in data rooms where sensitive materials across all operations of the selling party are stored. Online due diligence exercises are inevitable and are unlikely to be replaced by onsite due diligence due to the diverse nature of the parties involved, but the technology companies offering services are expected to implement strong security measures against cyber-attacks. 

How are Anti-trust approvals affecting M&A deals?

Whilst anti-trust approvals remain necessary in implementation of M&A deals, regulatory bodies should consider reducing the time for issuance of approval. Most jurisdictions provide for a timeline of not less than three months before an approval can be issued but during that time, a lot can happen which can significantly increase or reduce the asset value and eventually lead to closing issues following regulatory approvals. Not only that, but the factors considered by an Anti-trust Authority months back may have significantly changed by the date the approval is issued and this is mainly caused by multiple acquisitions that the parties may be implementing simultaneously. 

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