Latest trends in mergers and acquisitions - focus on South Africa and People

Mergers and acquisitions M&A is among the most complex, information-dense, and unpredictable processes in the corporate sector.

The M&A landscape in South Africa has undergone significant changes in recent years, driven by a range of factors including economic conditions, technological developments, and changes in regulatory environments.

According to a recent report, these transactions start with the promise of innovation, impact, and value creation by combining the strengths and cultures of two unique corporate entities, but these initial goals are often lost in the process.

Successful deals create a space for more collaborative, people-driven, and equitable negotiations and outcomes that never lose sight of this original focus.?

One notable trend in the South African M&A landscape has been the increasing focus on cross-border deals.

Companies are seeking to expand their global footprint and gain access to new markets, particularly in emerging economies.

There has also been an increased focus on prioritizing digital transformation.

Companies are actively looking to acquire innovative technologies and capabilities, particularly in the areas of digital transformation and artificial intelligence.

This has led to a rise in deals involving tech startups and smaller companies with innovative products and services.

Private equity firms have also become increasingly active in the South African M&A market. These firms have significant amounts of capital to invest and are often focused on driving operational efficiencies and improving profitability in the companies they acquire.

Regulatory changes, however, have had a significant impact on the South African M&A landscape.

Increased scrutiny of foreign investment in certain sectors has led to increased regulation and scrutiny of cross-border deals.

A company’s environmental, social, and governance (ESG) score has become a critical component in determining its value.

Issues like ethics, good governance, sustainability, and an increased focus on regulatory compliance have ensured that a high ESG rating is extremely valuable to stakeholders, shareholders, and individual and institutional investors.

ESG is something that should take centre stage on both sides of any deal.?

Amid increasing regulations, demands for transparency, and the rise of ethical consumerism, more investors are shifting their focus to these non-financial factors when it comes to decision-making, recognizing ESG ratings as valuable corporate tools to evaluate and drive change in areas like energy efficiency, worker safety, social impact, and board independence.

For industrial companies, displaying evidence of being ahead of the sustainability curve can be a core differentiator, not only in attracting lucrative supplier relationships or catering to increased customer demands but also in appealing to acquirers who aim to improve their ESG scorecards.

Sound ESG practices therefore create a strong opportunity for value creation in deals.

Considering these principles are shaping how buyers and sellers assess strategic fit to capitalize on synergies, ESG is a vital indication of company culture and future growth prospects.?

Therefore, by considering ESG factors during the due diligence process and incorporating them into their overall strategies, corporate buyers can identify great opportunities for value creation that can be integrated into post-merger integration plans.

Leveraging the target company’s ESG rating can also help identify new business opportunities and innovation models for existing processes.?

A company’s ESG profile is a good indication of the opportunities, but also of the risks, that a merger or acquisition might bring; risk assessment and mitigation are critical in transactions of this size and nature.

ESG portfolios are used to help determine value and ensure that company values and corporate cultures align. A target company with solid ESG reporting has less chance of entangling buyers into existing or latent ethical issues or public relations crises.?

For this reason, ESG is increasingly at the forefront of M&A due diligence processes, allowing prospective buyers or investors to spot any pitfalls and make an informed decision about the transaction. This also allows for a level of transparency and can save a company from reputational harm, both on the selling side and on the buying side, by providing insight into financial and reputational risks.?

The corporate world has shifted from being shareholder-focused towards being stakeholder-oriented.

Being socially responsible, environmentally conscious, and aligned with regulatory principles is extremely important to employees, customers, and investors.

The social impact of operations is also important for business considerations, so the onus lies on the company to ensure that the deals they make align with these principles.

Recent studies have found that both shareholders and stakeholders, as well as clients, increasingly expect companies and brands to focus on sustainability, contribute to global environmental goals, act in a socially responsible manner, and prioritize inclusivity and diversity across the board.

Working conditions and employee wellness, human rights issues, environmental impact, poor governance, and other ethical infringements can have a devastating impact on brand reputation, and with ethical consumerism on the rise, this hurts the bottom line.?