A NUMBER of global trends are having a profound effect on the appetite for mergers and acquisitions, according to Nick Matthews, head of mergers and acquisitions at KPMG South Africa.
Like the rest of the world, Africa is not immune from the latest monetary policy developments in the US, he points out. The recent announcement that quantitative easing will be under review may result in the era of cheap money coming to an end, he suggests.
"This tightening of monetary policy is likely to be supported by the continued positive employment data in the US, and higher growth rates. The world’s largest economy, while weak, looks like it is ready to come off life support."
Mr Matthews says this has had a marked effect on the capital markets, not only in the US where treasury bond yields have increased, but also in Europe, despite policy makers’ assurances that they will continue to support their economies through cheap money. Similarly in South Africa, equity prices have retreated as a result of expected outflows as foreign money leaves our shores in a hunt for higher yields. These foreign currency flows have also contributed to a weakening rand.
So what does this mean for mergers and acquisitions? Says Mr Matthews: "Increasingly mergers and acquisitions are driven by global trends, with cross-border mergers and acquisitions accounting for an increasing proportion of transaction activity. Just like portfolio flows chase yields, African mergers and acquisitions are driven by higher return on investment, principally through higher growth than in other markets."
He says that while South Africa’s growth statistics continue to disappoint, the prospects for the rest of the African continent remain positive. Of interest is the increased prominence of South-South mergers and acquisitions, between emerging markets. In the first six months of 2013, Chinese and Indian investors have been big acquirers in Africa.
Significant oil and gas discoveries have driven the growth in oils and gas reserves in Africa by 140% since the mid-1980s, and this will continue to drive mergers and acquisitions, Mr Matthews believes.
The first six months of 2013 saw significant investment by China National Petroleum Corporation and Oil India in oil and gas assets in Mozambique and Angola. "This is indicative of two trends — the continued hunt for resources, and a new propensity for South-South investment," he says.
"The mining industry, however, is in a difficult space. The commodity supercycle seems to have abated with the softening of many commodity prices. Activity in the gold and platinum sectors, which have seen declining prices and increasing costs, is expected to shift from acquisitive growth activity, to mergers and acquisitions focusing on making the industries more efficient.
"Anglo Platinum is considering the sale or closure of its Union Mine, and we predict some similar activity in the gold sector."
Adds Mr Matthews: "In the long term there is no doubt that Africa, in many respects, holds the key to many global companies’ growth ambitions.
"With a 1-billion population in Africa today, expected to grow to 2-billion by 2050, and with positive demographics, the continent will continue to present a hunting ground for global companies in the consumer-facing industries.
"Increasingly we will see other emerging markets playing in the African mergers and acquisitions space.
"In the short term, mining’s lustre will fade, but Africa’s natural resources will no doubt rebound as a source of direct foreign investment into the future."
