Africa should be considered a promising component of merger and acquisition (M&A) strategies, in spite of the relatively small M&A market size and the impact of Covid-19 on economies, a new report published by business strategy consultancy Boston Consulting Group (BCG) states.
Making up only 2% of the $3.1-trillion global M&A market in 2019, Africa’s M&A growth slowed even more in 2020; but, BCG forecasts a recovery ahead of gross domestic product growth recovery.
BCG MD and partner, and co-author of the report, Alexis Bour, says the company expects a sharp fall in volume and value, possibly 40% in 2020 to 2021, but followed by a gradual recovery of deal volume within 18 to 24 months, and a return to 2019 total value within three to five years.
BCG notes that an earlier-than-expected M&A revival in Europe in the third quarter of 2020 suggests that, even with the uncertainty around Covid-19, a global M&A recovery has started. BCG anticipates similar resilience in Africa.
Optimism about the future of investment in Africa is supported by the need to meet rising consumer demand for goods and services from Africa’s youthful and growing population.
“Tech opportunities in financial, health, agriculture and energy-related services are among the main engines of investment activity,” he says.
Bour adds that urban business and financial centres are blossoming, and first-generation African tech entrepreneurs are launching startups in need of local and global capital. “Financial hubs such as Casablanca Finance City in Morocco also connect the ecosystem of M&A players.”
Although Africa is a promising area for M&A activity, understanding of local context is key, BCG notes.
Almost 90% of buy-side M&A decision-makers in BCG’s M&A survey reported that managing uncertainty – economic volatility and other country risks – is their primary challenge.
To help guide investors, BCG has identified five main trends shaping the continent’s M&A landscape. The first is rising Africa-led acquisitions. Although the average value of foreign investors’ deals ($60-million) was twice that of African investors ($30-million), African acquirers’ share of deal value has been rising steadily by about 5% a year from 2012 to 2019.
The second trend is that more Africa-focused private equity (PE) investors are emerging. As such, BCG notes that PE deal volume in Africa has been growing at about 6% a year since 2012.
By 2016, there were more than 200 funds with upward of $30-billion under management.
BCG says that, of interest, is that the most successful PE firms happen to be African, while global firms have struggled to adapt their model to the African context.
The third trend is that technology startups are attracting multiple investors. In this regard, BCG states that fundraising for tech players increased by 64% a year from 2015 to 2019, driven mainly by investments in fintech, with a focus on financial inclusion. Further, startups in three countries – Nigeria, Kenya and South Africa – captured 80% of those funds.
The fourth trend – African integration – relates to regional markets and multi-country platforms having the ability to create scale, hedge country risk, and capture industry synergies and operational cost efficiencies.
The last trend involves State-owned enterprises possibly soon opening for private capital again. As such, BCG points out that privatisation was the main driver of government M&A in the late 1990s and early 2000s, but no privatisation over $1-billion has launched since 2006.
BCG states that a reversal of this decline in government M&A activity is expected for several reasons, including Covid-19 economic recovery interventions.