Business

Political and economic uncertainty the new norm for dealmakers

Staff Writer

 ·30 Apr 2017

3Political turbulence and economic uncertainty are becoming the new normal for dealmakers, according to Baker McKenzie’s Cross-Border M&A Index.

In Africa, M&A activity has dropped since the last quarter, but there are still big opportunities for investment on the continent.

Globally, buyers announced 1,238 global cross-border deals worth US$331.2 billion, a 23% decrease in volume and a 16% decrease in value compared to Q4 2016.

“There were several bright spots in the first quarter despite political issues and economic uncertainty providing a shaky foundation for M&A activity,” said Michael DeFranco, global head of M&A at Baker McKenzie.

“The consumer, energy and utilities, and pharmaceutical sectors all performed well and as political and economic uncertainty wane, we believe M&A activity will pick up as we move through 2017.”

According to the Index, Africa saw 14 outbound cross-border transactions worth US$704 million and 29 inbound cross-border deals totalling US$6.2 billion.

The deal values have dropped in comparison to the last quarter of 2016, where there were 11 outbound cross-border deals in Africa, worth US$ 4.6 billion and 22 inbound M&A transactions, worth US$11.4 billion.

Morne van der Merwe, co-managing partner of Baker McKenzie in South Africa, said the recent S&P Global and Fitch agency downgrades in South Africa’s credit status are expected to have a negative impact on the perception of the country 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 South Africa’s standing as a stable economy can be maintained.”

“On the plus side, the South African rand, has shown 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,” he said.

The Index shows that North America contributed the bulk of inbound investment into Africa in the first quarter of 2017, with investments valued at US$4.1 billion.

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 –  US$6.1 billion per quarter.

“There are many untapped opportunities for attracting foreign direct investment, which the South African government has acknowledged. In the 2017 budget speech by the minister of finance, 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 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 US$7 million in Africa in the first quarter of 2017 and investors from the EU spent US$ 481 million in Africa in the same time frame,” he said.

The report shows that African outbound investment is mostly concentrated in EU countries with US$625 million flowing from Africa to the EU in the first quarter of 2017.

“South Africa, and Africa generally suffer the consequences of currencies with weaker buying power for outbound investment. However, due to historic ties/involvement, as well as synergies in certain sectors, and a certain sense of familiarity, Europe has in general been favoured by local-grown businesses looking to go global.

“If anything, Brexit may have a positive impact on the trade relationship between Britain and South Africa as Britain may become more focused on finding trade relationships outside of Europe,” van der Merwe said.

Read: How many M&A deals are expected in South Africa in 2017