BUSINESS: South Africa Aligns with BRIC Countries in M&A Activities
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South Africa’s Privately Held Business (PHB) owners’ intentions to grow through acquisition seem to align with expectations of BRIC (Brazil, Russia, India and China) countries in the upcoming 12 months, according to Grant Thornton’s 2011 International Business Report (IBR) on Merging and Acquisition (M and A) activity.
BRIC countries showed the biggest positive swing globally with 44% of respondents considering acquisitions compared to 27% in 2010, a hike in expectation of 17%. This brings them more in line with South Africa’s expectations of M and A activity in the upcoming year. 41% of South African respondents are considering acquisitions compared to 37% in 2010.
“The acquisition growth strategies of South African businesses appear to be increasingly aligned with those of the other members of the BRIC countries in a number of key areas,” says Steven Kilfoil, director of Grant Thornton Corporate Finance, Johannesburg. The mere fact that a company is looking to make an acquisition sends a positive message. The reasons behind the acquisition provide an insight into a company’s long term objectives.”
Improving global economic conditions have increased international appetite for M and A activity in the year ahead, with 34% of global respondents looking to make acquisitions, up 8% from 2010. This global average lags South Africa and BRIC countries.
“BRIC and South African companies’ acquisition strategies seem to be focusing on consolidating positions within local economies before embarking on cross border acquisitions, which are riskier by nature,” says Kilfoil. “This is evidenced in the fact that business owners in both South Africa and the BRIC countries expect in excess of 80% of acquisitions to take place locally.”
The BRIC countries and South Africa may also be taking advantage of the relatively high growth rates in their local economies, in relation to the rest of the world.
When asked what the core reasons are for considering acquisition in the year ahead, over 71% of South African and BRIC companies indicated that they are looking for acquisitions in order to access new geographic markets.
“One of the ways companies can move to expand geographically without exposing themselves to the risks that cross border transactions bring, is to consider purchasing local companies with foreign expertise or foreign distribution channels,” states Kilfoil. “This enables the acquirer to obtain a geographical footprint beyond their borders without the same degree of integration risk. Set up costs can be minimised and the acquirer can avoid much of the compliance restrictions and the administrative burden that creating these channels yourself usually entails.”
With the promulgation of the Headquarter Company (HQ) tax legislation in January 2011, South African firms with expertise throughout Africa could well be targeted by local and foreign companies for their regional expertise. This should result in some interesting activity in 2011-2012. The HQ regime provides tax benefits to a South African company, set up by a multinational, to be a springboard into Africa and the rest of the world
A second key driver of acquisition strategy identified by SA business owners was the issue of access to lower cost operations. 54% of South African companies view this as key driver. BRIC nations are at 59% in 2011 a substantial increase on their 26% in 2010.
“It appears that the BRIC nations, which for a long period of time have been world leaders in low cost operations, are now looking around to find ideas for more efficient ways of doing business,” states Kilfoil.
The evidence of BRIC nations “looking around” is further emphasised by the increase in their desire to acquire new technology or established brands, a factor identified by 63% of BRIC business owners in 2011 compared to 44% in 2010. South Africa has remained fairly stable here, decreasing slightly from 51% to 47% in the corresponding period.
“While it is apparent from our research that certain similarities and trends tie us to our BRIC counterparts, we still have some strictly South African challenges and opportunities which differentiate us,” states Kilfoil.
These differences can be observed in the way in which South African companies plan to finance their expected acquisitions. Almost two-thirds of South African companies (66%) plan to finance their acquisitions through retained earnings compared to 50% of BRIC companies. Only 3% of SA companies plan to list to finance their growth compared to 16% of BRIC companies.
Interestingly, 27% of South African businesses are considering utilising private equity in their M and A strategies as compared to the global and BRIC average of 18%.
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