Merger and acquisition (M&A) transactions in South Africa declined in terms of both volume and value of domestic and cross-border deals, according to analysis by law firm Baker McKenzie.

Transactions fell by 44% and 52% in terms of volume and value, respectively, in the first half of this year, with 135 deals worth $3.2-billion signed, compared with the 243 deals worth $6.6-billion signed in the first half of 2017.

“There are a number of elements causing the M&A market contraction in South Africa. We should not underestimate the impact of corruption and suboptimal governance in South Africa on the mood of investors [locally and internationally],” says Baker McKenzie managing partner and corporate/M&A practice head Morne van der Merwe.

He adds that it has proved all too easy for business to get caught up in these issues. There are various examples of multinationals in South Africa and in Africa that have become embroiled in corrupted environments and there are serious consequences attached to this.

In the US and the UK, the antibribery and corruption laws carry with them significant penalties for noncompliance.

Van der Merwe explains that investor reluctance is not limited to concern over government corruption – the Steinhoff narrative has put South Africa in the spotlight and raised concerns about governance in the private sector as well.

Further, economic concerns, the threat of another credit rating downgrade, issues around service delivery, as well as the fact that South Africa is close to its next election, means that investors are also holding back, he adds.

There are also major political issues causing uncertainty and affecting investment confidence and appetite, including the debates around land reform and national health insurance.

INBOUND DEALS

In terms of sectors attracting M&A investment, Baker McKenzie found that industrials garnered the highest number of cross-border inbound deals into South Africa during the period, with a 22% share.

It was also the top performing sector based on aggregate value, representing 91% of the total. There were eight inbound transactions, worth $362-million, in the industrials sector in South Africa in the first half of this year.

“There are a lot of opportunities available in the industrials sector in South Africa, because it is so well established and has managed to stay the course in a challenging environment.

“Inbound investments in the industrials sector are also a good entry point into African economies as this sector is a focus area for many developing economies across the continent,” Van Der Merwe says.

He notes that a potential challenge facing Africa is the rapid international development of a "new economy" based on artificial intelligence, sophisticated systems and markets.

“We should be making sure that South Africa and other countries in Africa are not left behind. We need to encourage innovation, technological advancement and skills development and implement laws to protect innovators and users.”

OUTBOUND DEALS

Outbound deals from South Africa were mostly split between the materials, industrials, consumer products and services, and high technology sectors, each representing an 11% share of deal volume.

Each of these sectors completed five outbound deals in the first half of the year. However, in terms of aggregate value, financials was the most popular, accounting for almost half of the aggregate value – $1-billion.

In terms of outbound deal destinations, South African companies mostly engaged in deals with the UK (ten transactions making up 23% of the total deal volume).

“The ease of doing business with the UK, brought about by various factors, including, language, time zones, easy access, historical ties and familiarity, has meant that investment between the two countries has always been good.

“Brexit has impacted positively on investment between the UK and South Africa in that it has caused UK trade outreach initiatives to a variety of its historic trade partners, including South Africa,” Van der Merwe says.