Recent travels included attendance at our annual global Investment Banking conference, this year hosted in Wiesbaden, and included 40 senior M&A professionals with representation from our Investment Banking teams in the UK, France, Germany, the Benelux region, Switzerland, the US, Australia, India and South Africa.
In our general experience, the market themes and dynamics in more advanced economies are often leading indicators in the medium term for the corresponding South African sectors. I share several key themes below, that are currently front of mind across our global investment banking M&A franchise.
1. Increased complexity in deal execution (both signing and completion)
The general financial performance environment of businesses across the world remains highly volatile. Considering a macro backdrop that comprises interest rates last seen during the global financial crisis, increasing geopolitical tensions, recession fears and near-term elections in South Africa, the US and India (to name a few), it’s a challenging set of circumstances for businesses to achieve previously envisaged performance.
In addition, although the impact on businesses and sectors are varied, a volatile business environment has a material effect on the sentiment and therefore confidence of investors, buyers, sellers and management teams of businesses.
With an increase in volatility, the time taken to conclude a price that is acceptable to both sellers and buyers, complete due diligence and agree on any risk sharing (from the time of signing a deal to until deal completion, or once any suspensive conditions are met) can be materially increased. Furthermore, the longer time taken to conclude on these fundamental deal parameters, increases the chances further evidenced volatility.
Regulators too are in some instances having an increasing impact on the time and process taken to conclude deals. This can at times be because of increased scrutiny and regulatory hurdles relating to foreign ownership restrictions, protection of labour and broader public interest considerations.
Where we have also seen volatility impacting deals, is in the reduction in number of megadeals globally. The stakes of getting deal decisions wrong in a megadeal are high and in an increased risk environment, getting all decisions right can be challenging.
2. Bridging the gap between buyer and seller valuation expectations
Recent pressures on general market valuation levels have prolonged a trend of divergence between buyer and seller expectation levels regarding pricing of assets. In several of our businesses, we found this trend becoming more meaningful leading up to the more severe years of the coronavirus pandemic.
While having some reprieve through a period of “cheap” money coming out of the global pandemic, the so-called “buyers’ market” theme has been prevalent for the last few years and still exists strongly today. General buyer appetite is being curbed by a high cost of capital and a reduced ability to finance acquisitions through utilising debt.
As a consequence of the above drivers, we are seeing increased time being spent on creative M&A process design, deal structuring, facilitating more common ground being found by buyers and sellers. Importantly for sellers, accurately understanding what buyer appetite and price expectations are likely to be before going into a sale process are crucial.
3. The importance of deal preparation and timing
With rapidly changing market conditions, there are sometimes small windows of stability which allow a more optimal time to go to market for a transaction (particularly when considering the right time to launch a sale process), thereby increasing the chances of success for concluding a deal.
To be able to capitalise on more optimal timing, preparation for sale (or purchase) needs to have been sufficiently undertaken over an appropriate length of time. In most cases this can be achieved between three and six months, but more complicated businesses and sectors will likely require more preparatory time.
For a sale of a business, key preparatory workstreams can include undertaking a bespoke buyer education process, vendor due diligence covering accounting, legal and tax matters and in some cases including a commercial study. Importantly, spending sufficient time on marketing materials and presentations together with a detailed review and consideration of the buyer universe will substantially increase the chances of successfully concluding a transaction.
When considering a potential purchase of a business, importantly, the acquisition should align to a carefully considered strategy. Without the ability to measure oneself against a chosen strategy at the time of considering a potential acquisition, the transaction may likely result in a reactive response from the acquirer and can often lead to the acquirer either overpaying and / or increasing the chances of destroying value for the acquirer’s shareholders.
While having some reprieve through a period of “cheap” money coming out of the global pandemic, the so-called “buyers’ market” theme has been prevalent for the last few years and still exists strongly today.
4. Increased focus on sustainability
Outside of recent trends in the natural resources and industrials sectors where companies have been looking to acquire capabilities and assets specific to their ESG requirements and objectives, sustainability is becoming a universal thread across all sectors in deals.
Sustainability considerations are increasingly being integrated into the due diligence process. Buyers are looking at a range of sustainability factors, including carbon emissions, water usage, and social impact, to assess the long-term viability of a target company. Sustainability considerations in M&A are expected to become increasingly important and to remain a key trend in the future.
5. Opportune time to undertake strategic acquisitions
Although we find ourselves in a challenging macro environment, valuation levels of publicly listed companies are significantly below long-term averages, particularly in South Africa. For example, current public market valuation levels (utilising forward price-to-earnings ratios as an indicator) show listed companies in South Africa trading at approximately a 30% discount to the long-term average (ten years). The same can be said about the United Kingdom (30% discount), with broader Europe being closer to a 20% discount.
For strategic or trade buyers, the opportunity to accelerate their strategic ambitions through acquisitive growth has seldom been better. It is this strategic opportunity that will also allow trade buyers to be able to compete more effectively for prized assets (against a lower point in the valuation cycle) relative to financial buyers than has been the case in recent years.
We expect this trend to continue until there is a general repricing of assets, driven by more market confidence in the interest rate and macro-economic outlook.
6. Technology deals no longer sector specific
Nothing new here – management teams have for years been grappling with the impact of technology and digitisation on their businesses, including everything from supply chain management and reporting systems to customer experience. Many have unsuccessfully attempted to outsource technology requirements to universal providers for functions which required a more bespoke offering.
Nearly every industry sector has been impacted by digital and mobile technologies. Acquisitions of technology-rich targets have become a prioritised wish list for acquirers looking to bolster innovation, streamline operations and processes and shape customer journeys and experiences.
Furthermore, management team considerations regarding the potential impact (and opportunity) of artificial intelligence and most recently, generative artificial intelligence has increased substantially. Many are still developing an understanding of the technology’s business value and risks. Is artificial intelligence tech hype or a fundamental game-changing opportunity? We expect the latter.
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7. Strong balance sheets of large corporates and sovereign wealth funds (direct and indirect) are a key source of capital
There has been a recent uptick in the general balance sheet strength of large corporates because of a more conservative approach in capital allocation since the coronavirus pandemic. This increased availability of “dry powder” has in certain cases resulted in increased share buyback activity, particularly where firms have been unable to identify organic or acquisitive growth opportunities, which return value in excess of their cost of capital.
We have seen a remarkable increase in the activity and available liquidity from sovereign wealth funds, whether directly or indirectly through portfolio companies, seeking international acquisition and investment opportunities. The recent increase in activity has been most prevalent from those countries looking to diversify their national economies.
Being on top of the key drivers of dealmaking internationally and being able to interpret the impact of these in a local market context are essential to providing valuable and differentiated advice to our clients. More than ever, having the right expertise in your camp from the start (even better if well before the start) of any potential corporate activity allows you the best chance to successfully achieve your strategic objectives.
Over the last two decades we have built a global M&A advisory group that draws on over 150 Investec M&A professionals, organised into international sector teams and financial sponsor client coverage. We maintain a regular dialogue with most likely buyers, sellers, equity/debt investors and target companies around the world in select sectors.
In addition and since 2019, Regions Securities (Regions Bank) has been our exclusive investment banking partner in the US (including BlackArch and Clearsight as its subsidiaries), adding comprehensive investment banking coverage of the US middle market with 100 professionals across the country.
This week sees us hosting our flagship 22nd Investec South African CEO Conference in London and we have been positively surprised by the strong demand for engagements. This comment from our Equity Capital Markets desk says it best: “Very encouragingly, we see the large global allocation funds returning in earnest and sending large contingents to assess opportunities. This includes some significant US institutions who are making the trip over. We are limited to 22 South African listed corporates (being represented by 58 attending corporate executives) and have well over 500 meetings scheduled. …the calibre of institutions and their representatives at the conference speaks volumes for the distributions team’s position in international markets.”
We are extremely proud of the recent growth seen across our international investment banking business and we look forward to continuing to offer a differentiated service offering to our clients.