Acquisition Finance: Oiling the Wheels of Business Deals

Mergers and acquisitions offer a handy insight into the health of a business environment. Acquisitions are usually done by large corporates to meet strategic objectives, including growth and diversification. However, M&A activity in South Africa is currently experiencing headwinds owing to political and macroeconomic factors. An analysis by DealMakers South Africa shows that total deal value by exchange listed companies for the calendar year to end-June 2019 was R100.7bn (including seven failed transactions) from 212 deals. Excluding failed and foreign deals (offshore companies with secondary listings in SA) the deal value drops to R80bn (184 deals) compared with H1 2018 of R135bn (208 deals) – a 41% drop in value and 12% in number.

Generally the relatively lower valuations, compared to previous multiples, present a good buying opportunity and analysts anticipate an uptick in M&A activity in South Africa over the next three years. However, potential acquirers are discerning in their approach and are taking their time before making investment decisions.

Acquisition funding

One of the most important decisions in making an acquisition is the manner in which a transaction is to be funded:

1. Certainty of funding is key for the sellers, particularly if the target is a listed entity;
2. Timing is also important and therefore it is critical to partner with an experienced and reputable funder that can secure funding on time;
3. Cost of funding for an acquisition should be managed carefully as it affects the overall returns of the transaction; and
4. Funding for a large acquisition will affect the company’s capital structure and must be considered in the context of the company’s long-term capital management.

Broadly speaking and for the purpose of evaluating available funding alternatives, acquisitions can be split into two; bolt-on acquisitions and transformational acquisitions.

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