The Covid-19 effect:
Mergers and acquisitions soar
as 'alpha companies' rise

Covid-19 has spelt danger for businesses not equipped to adjust to the "new normal", opening the door for cash-flush companies to use their strength to acquire competitors in a record-breaking year for mergers and acquisitions globally.

There wouldn't have been a single industry unaffected by the black swan event that was the onset of Covid-19 lockdown in March 2020. As businesses were forced to move online and find ways to reach customers now shopping online, less agile companies found themselves struggling in a bid to sustain themselves through the storm.

As a result, merger and acquisition activity globally has already flown past the $2 trillion mark in a record-breaking 2021 thus far, according to global provider of financial market data Refinitiv. In South Africa, mergers and acquisitions brought in around R760.8bn in the first half of the year, according to media reports, with the value of deals rising by a mammoth 958%.

Many of these deals would have been facilitated by genuine growth opportunities in sectors – like the tech sector – that are poised to benefit from the changes in digital transactions. But many of the deals have been completed due to many companies being unable to ensure cashflow during a difficult season and ensure a future for their staff and partners.

With growth as a theme for 2021 following contractions in the South African economy over the past 18 months, "alpha companies" have emerged to generate alternate revenue streams for their own firms, by acquiring these companies that would ordinarily go bust.

Mergers or acquisitions can traditionally be described as an association or series of transactions, in pursuance of a final agreement between two or more companies, which will result in those companies merging and forming one or more companies. Historically, it has been seen as a substantial way to grow and generate profit and alternate revenue streams.

In Africa for instance, while the continent shares only a small proportion (2%) of the global mergers and acquisitions market, private equity deal volume within the continent has grown at roughly 6% per year since 2012, according to global firm Boston Consulting Group. By 2016, this growth had led to more than $30 billion in investments managed by over 200 funds dedicated to Africa.

Now, news headlines as of June this year showed that global mergers and acquisitions totalled a record $2.4 trillion, up 158% from the same period last year, Fortune reported. That marked the highest year-to-date total going back to 1980 when Refinitiv’s records began.

This trend can be seen being played out in strong macro-economies like the US too, often a forerunner for emerging patterns in the global economy. US businesses spent $1.74 trillion on mergers and acquisitions involving US companies during the first six months of the year—the highest amount in more than four decades, the Wall Street Journal reported. This is up from the $511.79 billion spent in the year-to-date period before, and involved 9 725 deals.

More than a year after the Covid-19 pandemic changed the globe forever, the full economic impact is far from over, says Herman de Kock, Executive Head of Sales and Service at Nedbank Business Banking

"Considering the lag effect that such a historic event like Covid-19 has on markets, there are still significant headwinds awaiting many a business, especially those less able to adapt to the new normal."

Similarly, South African opportunities for mergers and acquisitions have also grown tremendously following the onset of Covid-19.

The 958% increase in the value of local deals completed in the first half of 2021 were led in the main by deals in the technology sector, reported IOL. Citing the latest Refinitiv analysis, inbound investment in South African technology firms accounted for 12 of the transactions, representing a 200% increase in deal volume year-on-year.

"It looks like South Africa is leading the way in terms of high value deals in the tech sector and we expect this tech merger and acquisition trend to continue as the continent gears up to operate in the post-pandemic new normal," Refinitiv said.

All in all, 169 mergers and acquisitions took place, 80 of which were between local companies and 89 occurring cross-border. The US was the primary investor in South African companies overall, completing 16 deals valued at $496 million.

While many of these deals have taken place due to genuine opportunities and growth potential in sectors like the African tech sector, the sheer volume increase has been indicative of the inability of smaller, traditional companies to pivot their business models to the changing needs of customers.

"Throw on top of this scenario unfavourable gearing as a further weakening of a balance sheet and the 'weaker' companies become prime targets for competitors as a means for growth."

Five tips for a smooth merger

While the circumstances for each merger or acquisition can be unique, there are key principles that can be strived for to ensure a successful, smooth and honest transaction.

According to the Forbes Business Council, companies that are looking at mergers and acquisitions can consider five key tips:

1. Ensure fairness for all parties – A merger or acquisition is dependent on both parties being amenable to an agreement. The satisfaction of the acquired organisation is necessary to ensure the smooth completion of the deal.

2. Culture is important – Culture shock is a process that employees from both sides must work through. A change in language from leaders, using words like 'ours' and 'we', helps to bridge any divide.

3. Reputation matters – Relationships in past negotiations can affect future deals. Alienating staff or failing to listen to key players can negatively impact your reputation.

4. Not all deals will be right - Some mergers may not be the correct fit due to fundamental differences between the two parties. Knowing when to walk away can be beneficial.

5. Secure buy-in from key players - Invest in individuals from the selling company to demonstrate your commitment to them. This creates good will and buy-in.

The types of industries, as well as the risks and opportunities presented by the pandemic and the nuances of the South African economy are pivotal to the decision to proceed with the structuring of a transaction.

Banks play a crucial role in the structure of any merger and acquisition, lending advice, support and technical skills in the structuring of deals to companies looking to grow through acquisition. Companies looking to acquire competitors need to consider synergies, such as cost, technology and culture, and must ensure these are linked to balance sheet and income statement benefits.

"Nedbank Business Banking Specialised Finance division is uniquely positioned to assist these companies in their quest to grow through mergers and acquisitions," says de Kock. "Through the rich skills and experience this team provide industry leading advisory services with the intent to assist businesses with the decision making and structuring of transactions to ensure sustainability."

With more than 100 years collective experience, the Specialised Finance team is highly skilled in management buyouts, leveraged buyouts, expansionary finance and BBBEE transactions, offering industry-leading debt structuring services to help businesses with decision-making, de-risking. Its network of contacts also allows for the listing and delisting of companies, as well as trade sales.

Teaming up with a highly-skilled bank can be a key avenue a cash-flush company can pursue to secure genuine growth and generate alternate revenue during an uncertain 2021.