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AFRICA: Middle-Market Deals to Fuel M&A Rebound As Acquisition Appetite Hits 3 Year High


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Appetite for expansion by African companies has remained stable, with 23% of companies anticipating to pursue acquisitions over the next 12 months, compared with 19% last year. This is according to EY’s 11th bi-annual Global confidence barometer, a survey of more than 1,600 senior executives in more than 60 countries.

-23 % of companies across Africa anticipate acquisitions over next 12 months
-Mid-market to drive next M and A wave with focus on core business
-Bulging M and A pipeline; expectations for further expansion doubles in six months
-Economic and valuations stability boosts M and A appetite after five year slump

The global picture is relatively bullish – 40% of companies globally anticipate pursuing acquisitions in the next 12 months, the highest number for three years according to the survey. More robust market conditions and expanding deal pipelines should see global M and A return to 2006 pre-crisis volume and value levels after a five-year deal slump.

While 2014 has been notable for high-profile mega-deals, the Barometer suggests that mid-market M and A will provide significant lift to deal activity. Almost two thirds (60%) of respondents expect deal volume to increase further in the next 12 months – even after a relatively positive 2014 for M and A. The African market is expected to remain stable.

Pip McCrostie, EY’s Global Vice-Chair, Transaction Advisory Services, says:

“Our previous Barometer predicted the wave of mega-deals seen in 2014. These multi-billion dollars deals are having a ripple effect on the M and A market. They increase confidence in M and A and trigger transaction activity further down the deal chain.

“With the appetite to acquire at its highest for three years, we now expect a new wave of M and A with much more focus on mid-market sized deals under US$1b. This new middle-market momentum should lift M and A activity as companies seek to strengthen – and expand – their core business. The result should be a far more buoyant deal market than we’ve seen for the past five years.”

Pipeline bulges as stability provides platform for bullish deal intentions

A bulging M and A pipeline is the clearest indicator of future activity. The deal pipeline has increased by a remarkable 30% since April globally. In addition, two thirds (66%) of executives both globally and locally expect the M and A pipeline to expand further over the next year – this is more than double the number expecting expansion six months ago.

A further sign of bullish deal sentiment sees more than half (53%) of respondents anticipating an increase in hostile and unsolicited approaches.

Greater stability in terms of macro-economic confidence and valuations are stimulating bullish deal sentiments. The valuation gap remains stable. Half of executives see only a small discrepancy between buyers’ and sellers’ expectations on asset prices – encouraging deal making in the near term.

M and A activity is also supported by greater C-suite confidence levels in the global macroeconomic climate. The number of executives who view the global economy as stable has almost doubled in a year (from 24% to 44%). Senior executives in Africa are equally confident, with their numbers rising to 54% from 27% a year ago. Geopolitical issues remain the biggest concern for 34% of African executives, although this is a significant decline from 54% six months ago. However, this concern is counteracted by a huge swing in positive sentiment regarding corporate earnings both on the continent and globally.

Says Sandile Hlophe, EY Transaction Advisory Services leader for Africa: “Stable asset prices as well as increasing confidence in stability of the global economy are encouraging a more buoyant outlook for M and A. Having experienced many years of volatility, this growing stability provides greater certainty in terms of strategic planning – although executives both globally and in Africa will continue to closely monitor unfolding geopolitical events.”

Momentum in middle-market to drive M and A

The M and A story of 2014 so far has been the return of the mega-deal. The climate continues to remain favorable for large acquisitions. However, the growth of M and A for the next year should be in the wave of middle-market deals, with a major shift in focus among respondents looking to do deals valued at US$250m and under.

“The majority of acquisitions across Africa are more focused on expanding to new geographical markets, while a significant number are aimed at reducing costs and improving markets. The war of talent on the continent also seems to be a big focus as well, as 35% of executives have indicated that their M and A strategy is being driven by a need to source exceptional talent,” says Hlophe

The increasing influence of shareholder activism is helping to ensure that cost management remains a critical component of organic and inorganic growth strategies. More than 40% of African executives and nearly half (48%) of global respondents say that cost reduction has been elevated on the boardroom agenda as a result of shareholder activists.

The destinations and sectors of deal choice

Sentiment towards mature and emerging markets remains balanced. Countries such as the US, UK, China, Japan, India and Australia are expected to be the key potential buyers. Meanwhile, Brazil, China, India, UK and the US are the top five destinations of investment choice. In Africa, Nigeria and Mozambique are the top investment destinations for African companies.

Sectors with the highest level of acquisitive intent are Automotive, Technology, Life Sciences, Telecommunications and Consumer Products.

McCrostie concludes: “After years of contraction and stagnation, deal activity globally looks set to return to pre-crisis levels. The transformative deals hitting the headlines in 2014 are set to continue. However, the next chapter of the M and A story should be mid-market momentum taking deal activity to new heights.”

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