Why international investors are upbeat about SA tech companies

Law firm Baker McKenzie has released its latest quarterly Cross-border M&A Index, showing a massive drop in the number of inbound M&A deals across Africa and South Africa – but there’s a positive spin for the SA tech sector.

According to the report, there were 17 inbound M&A deals in Africa in the second quarter (Q2) of 2017 – a 48% drop from 33 deals in Q2 2016.

The total deal value for inbound deals amounted to US$780 million, decreasing by 83% year-on-year and 88% on a quarter-by-quarter basis.

According to Morne van der Merwe, managing partner of Baker McKenzie, almost half the continent’s M&A activity flows through South Africa, meaning that recent local developments would have a significant negative knock-on effect in Africa.

“Foreign Direct Investment (FDI) in South Africa has decreased and this will continue until the local investment climate stabilises,” he said.

“Due to the credit ratings downgrades, the cost of raising capital for acquisitions has become more expensive, making deals more difficult. In addition, the Rand has been one of the most volatile currencies in 2017 and this volatility has suppressed deal appetite.”

“These factors, combined with recent political instability and uncertainty, have resulted in a perception in the market of increased risks of doing business in South Africa. Global players are finding more attractive investment destinations elsewhere.

South African tech companies

According to the M&A Index, there were no inbound technology deals in Africa in the second quarter of 2017.

This is despite global results, which noted a high volume of technology deals in the first half of 2017, with the number of cross-border technology deals higher in H1 2017 than in any post-crisis half-year period.

However this data likely points to good news for South African tech companies, van der Merwe said.

“Africa has several technology hubs, including one in Cape Town, and the development of technology in the banking and finance sector, for mass usage on the continent, is well advanced,” he said.

“A positive explanation for there being no inbound deals in this sector in Q2 2017, is that this is not due to lack of IT development in Africa, to the contrary, but because IT companies are structuring their operations in a way that allows them to enter into partnerships offshore and bring their operations into Africa through licencing arrangements.”

This is reflected in the positive number of cross border outbound deals, with South Africa boasting the majority of the 15 cross border outbound deals in Africa for the second quarter of 2017.

Technology tied with Business Services was a top target industry for Africa’s outbound deals by volume with a total of three deals for the quarter (20% of total).

In terms of deal value, the Financial Services sector led slightly with $535 million or 35% of total deals.

Technology deals came in close second, accounting for $510 million or 33% of total outbound deals from Africa.

“An increase in development in African telecoms industries, as well as the opportunities presented by a rapidly developing financial services sector, remain key drivers of outbound investment activity in Africa. The growing financial services sector has also seen domestic banks make significant investments in technology, including in offshore companies,” said van der Merwe.

“As discussed, the increase in outbound deals in the technology sector also points to African technology companies looking to base their local operations offshore,” he said.

Read: A simple demonstration of how SA businesses can use blockchain technology

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Why international investors are upbeat about SA tech companies