The urge to merge is alive and well. Merger notifications jumped to 150 (2017/8) from 130 (2016/17), according to data by the Competition Authority of Kenya (CAK).
Seems an election year was not enough to stifle acquisitions: deals meeting the threshold for full merger analysis stood at 42, up from 41 in the previous year. That said, a pick-up in deal making may not be a good sign for the share markets.
If history is any indicator, peaks in merger and acquisitions (M&A) activity have been followed in short order by a recession. But that’s not the agenda of this letter. Today we try to make sense of the M&A upsurge in the past year; what are the tailwinds? Should we expect more companies prenuptials? What may possibly weaken the market for mergers?
To begin with, the concentration of corporate mergers within manufacturing, real estate, distribution, investment, services, advertising and agriculture sectors partly reflects something: the effects of the rate-capping law. Possibly, anaemic growth in credit to private sector may have catalysed M&A transactions within these cash-intensive sectors. Based on the CA report, these sectors accounted for 51.2 per cent of all announced transactions. In addition, latest Central Bank of Kenya’s (CBK’s) Quarterly Economic Review shows that real estate sector had the highest increase in non-performing loans (15.8 per cent). Manufacturing came second (11.6 per cent) followed by trade (7.3 per cent).
Rise in deals also points to the increasing appetite by deep-pocketed private equity (PE) funds. Acquisitions of Kenyan companies by foreign stood at 55.3 percent (down from 72 per cent reported in the 2016/17 period). These funds may continue stepping-up activity considering the country’s global ranking improved 19 places to 61 according to the World Bank’s Ease of Doing Business 2019 report. The Sh4.8 billion investment in Cellulant is a good sign that a growing appetite for big ticket deals is just getting started.
An absence of organic growth (in some sectors) is another force pushing companies to head the merger way. In this kind of environment, companies typically turn to M&A for growth, for market share and to reinvent their business models.
Of course, some would be fending off competition via this route. Be that as it may, as the perennial need for growth persists, it points to a strong deal activity ahead.
Going into the future, an array of forces, such as the review of Merger Threshold Guidelines, is likely to provide more tailwinds for the M&A world. The review is expected to remove some of the regulatory uncertainty around big mergers. Excluding transactions with combined turnover or assets below Sh500 million should further promote investment especially involving SME’s.
Such significant pro-business legislation should drive more deal making. More importantly, a healthier economic outlook could push this activity too. The value of the deals considered by the authority last year are estimated to have contributed a total of Sh66 billion to the Kenyan economy.
That said, risks such as the concerns regarding regulatory unpredictability, faltering economic growth, may become major headwinds. In all, as the M&A trend picks up, prospects for 2019 remain strong.