For a long time, Africa has been a center for foreign investment in emerging market enterprises. A new trend, however, is beginning to develop: African business are engaging in greater and greater intra-African merger and acquisition activity. In 2014, global African merger and acquisition activity was valued at $11b and intra-African merger and acquisitions activity was valued at $4b. In 2015, global African merger and acquisitions activity was valued at $9b, but intra-African merger and acquisitions activity surged to $15b.
While recent trends have made Africa the second most attractive investment destination in the world, a diversification of investments has begun to reshape the continent’s economy. In the early 2000s, six of the ten fastest growing national economies came from Africa. The reason: Africa has tremendous natural resources and the early 2000s saw a huge boom in commodity prices. Now, with commodities down, many African nations are struggling to keep their economies afloat. Enter the new generation of intra-African merger and acquisitions. 2015 saw a number of large intra-African merger and acquisitions in the telecom and financial sectors. Nigeria’s second largest mobile phone firm will soon acquire acquire the wireless company Comium Cote d’Ivoire for $600 million. And Atlas Mara, a financial firm founded by a Ugandan entrepreneur, will acquire a 45% stake in Banque Populaire du Rwanda. Atlas Mara also purchased a 75% stake in Rwanda Development Bank in 2014.
2016 will hopefully be a resilient year for a continent hit by slumping commodity prices. The biggest deal announced so far, the South African investment firm Brait’s planned acquisition of British retailer New Look, is valued at $3b. And while a few deals hardly support an entire continent’s economy, the transition of Africa being a destination for foreign investment to an environment of organic growth is significant. The next few years will be critical for African enterprises to establish themselves as sustainable players in the global economy. In the best case scenario, Africa is able to diversify it’s economy while commodity prices are low, so that when prices rebound, Africa and it’s strengthened firms will be able to take advantage of them.
Sources
http://qz.com/408742/african-businesses-are-splashing-out-more-on-ma-in-2015-than-ever-before/
http://qz.com/535075/the-global-commodities-slump-is-hitting-africa-hard/
8 Comments
I had always heard that Africa was the continent for investment in the 21st century, but I never knew it was on this sort of scale. One point you made that I wish to pursue further is the Intra-African M&As. I believe this to be a much more crucial trend to observe in years to come. African investment is great for the continent, but one would think that mergers between strictly African firms would benefit the continent better than outside countries acquiring African firms. One possible reason that figure is smaller than total acquisitions is still very present corruption and hostility in the region. It is not desirable for a firm to set-up shop in a country that cannot credibly commit to its regulations and finances due to corruption or outbreaks of war or disease. Maybe I am assuming that the worst qualities of Africa are present everywhere in the continent, but there presence still seems to persist to a considerable degree.
We need to ask our normal questions about the rationality of mergers: (i) do they give such market power as to allow better margins to offset the likely premium that the acquirer has to pay? (ii) are there efficiency gains?
In the African case both matter. Markets are smaller as even with a large population average incomes in places such as Nigeria remain low, particularly if you exclude the income of the oil barons. So it’s less likely that you’ll have a plethora of firms competing for any given service or product. Second, firms are likely less well run on average, as they are new and because they’ve focused on growth rather than operating efficiency [and market power may have insulated them from competition and hence market pressure to control costs]. Hence efficiency gains are quite possible.
A final piece is the potential for across-border trade. In the case of beer, logistics costs might be much lower if you could readily ship to a nearby country: Gambia might be the extreme example. Draw a circle around the capital: even if you had an efficient-sized brewery there, most of the ideal market would be in other countries, and most of the market in the Gambia would likewise be better served by brewers in adjacent countries.
With economies around the world picking up again after the Great Recession, I think we can expect to see a lot of growth in economic activity – especially international activity – from many countries in Africa (particularly West Africa). As foreign businesses flock to African countries, foreign investment will lead to more foreign investment, and capital will accumulate. It will be interesting to see how much certain African countries will develop and change during our lifetime.
The notion of increased efficiency is particularly interesting in this case. I wonder if synergy will play a large part in these mergers and acquisitions. If not, I wonder how African firms will increase their efficiency. Further, I wonder why the companies merge in the first place if there seems to be little competition. Could they not manage gathering their own market share in a market that isn’t particularly crowded? My father worked in international trade in northern Africa for most of my childhood. I never understood his commentary on the state of things there until I grew older and got a better handle on economics. In speaking with him, I have come to understand that we, as Americans, have little grasp on the squalor in which most of Africa lives. Even as they pull themselves out of poverty, their cultures affect their economy greatly, resulting in markets we can study but might never understand without taking part ourselves. With this in mind, I wonder if African countries will ever meet the efficiency standards set by European and North American firms.
I would like to see the investment numbers broken down by country. Who is investing in Africa and what is the nature of their investment? China, in the last ten years, has engaged heavily in their own “dollar diplomacy” with China. They have built soccer stadiums, damns, irrigation systems in exchange for the legal rights to African natural resources. Are there other countries doing similar investments? Also, have these investments inflated African investment numbers? This “dollar diplomacy” will only hurt the continent as a whole and cannot be considered true investment. They African countries lose the rights to revenue generating natural resources and get a decaying structure which they do not have the resources to upkeep.
I think that this increase in M&A activity will likely lead to a dramatic growth in the African economy. But with this surge in job opportunities I think that it will be interesting to see if Africa will have enough qualified candidates to fill these positions. In larger cities this may not be a concern but as the economy grows certain countries may experience a talent shortage due to a lack of widespread accessibility to education. I think this is something that local governments may want to begin to consider today in order to reduce the potential talent shortage in the years to come.
Kelly you make a great point about education. While Africa seems to be growing at an increasing rate, it is no secret that they do not have a great education system. In order to maintain this steady growth, it seems that they will need to revamp their education system in order to keep up with the demand for skilled labor. As for the situation now, those with basic education will be immediately demanded as they receive a higher rate of private return from education. It will certainly be a long and difficult road for the continent and it will be interesting to see if investors are willing to stick with them moving into the future. One thing is certain, if Africa wants to turn itself into the business giant everyone is waiting for, they will have to invest a great amount of money into human capital.
The blog sheds light on an emerging yet remote economy. I personally think this is great news for Africa because bigger corporations are better equipped to develop infrastructure that could have spill-over effect for smaller players in the market, and that’s what Africa and any developing countries that lack government commitment into economy and its long term growth need.
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