South Africa aligns with BRIC countries in expected M&A activity


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 M&A activity.

BRIC countries showed the biggest positive swing globally with 44 per cent of respondents considering acquisitions compared to 27 per cent in 2010, a hike in expectation of 17 per cent. This brings them more in line with South Africa's expectations of M&A activity in the upcoming year. 41 per cent of South African respondents are considering acquisitions compared to 37 per cent 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&A activity in the year ahead, with 34 per cent of global respondents looking to make acquisitions, up 8 per cent 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 80per cent 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 per cent 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 per cent of South African companies view this as key driver. BRIC nations are at 59 per cent in 2011 a substantial increase on their 26 per cent 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 per cent of BRIC business owners in 2011 compared to 44 per cent in 2010. South Africa has remained fairly stable here, decreasing slightly from 51 per cent to 47 per cent 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 per cent) plan to finance their acquisitions through retained earnings compared to 50 per cent of BRIC companies. Only 3 per cent of SA companies plan to list to finance their growth compared to 16 per cent of BRIC companies.

Interestingly, 27 per cent of South African businesses are considering utilising private equity in their M&A strategies as compared to the global and BRIC average of 18 per cent.

"There is strong competition in the market between the various local and global private equity funds looking to deploy capital in South Africa, with many viewing the country as a stepping stone into the rest of Africa. This is making private equity an increasingly attractive option for South African businesses looking to grow," concludes Kilfoil.

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