According to Ernst & Young's 11th annual survey of mergers and acquisitions in SA, M&A transactions recorded in 2001 totalled R502,4bn. This was 35% up on 2000's total of R372,2bn, the previous highest.
Despite the apparent increase in deal value, the underlying trend of 2001 was a contraction in deal-making. This paradox is attributable to two deals alone: the R223,2bn merger of Billiton Plc with Australia's BHP and the R153,7bn restructuring and delisting of De Beers. These deals accounted for 75% of the total value of M&As during the year.
Their record-breaking dominance disguises the fall-off in value of deals in the category of R500m and above, which typically accounts for 80%-90% of deal value in any year. If the two large deals and deals by SA companies with primary listings overseas are excluded, the value of the remaining purely domestic deals recorded in 2001 actually fell to a third of the value of the equivalent deals in 2000. The number of deals recorded in 2001 also reflected a downward trend.
This downward trend in deal number and value reflects the events that took place during the year. Companies typically make deals in an environment of stability; and 2001 was a volatile year, even before the September 11 terrorist attacks in the US . The level of M&A activity was already in a downward spiral at the beginning of the year as the global economy, and the US economy in particular, went into a contraction phase. This was bound to affect SA sooner or later. Then came September 11, the global equities crash and the collapse of the rand .
This lethal cocktail of negativity put domestic M&A activity under. Many deals in the pipeline were postponed . SA was also affected by negative perceptions of emerging markets based on instability in Zimbabwe and the renewed economic crisis in Argentina.
Main trends of 2001
The strongest trend in the equities market and in corporate finance in 2001 was the activity in the resources sector. More than half (53%) of the market capitalisation of the JSE Securities Exchange is now made up of resources stocks, compared with 17% for the financial services sector. Two years ago these sectors each accounted for 33% of the market's total value.
In addition to Billiton, Anglo American Plc and De Beers, other active players in the resources sector included Gold Fields, Harmony and AngloGold, each of which was in the news with big bids. It is also no surprise - not just because resources are the largest part of the JSE, but also because of the empowerment aspects of the new minerals legislation - that the biggest black empowerment deals of the year were in the resources sector.
As in 2000, many of the large deals announced in 2001 involved SA's six offshore-listed companies: Old Mutual Plc, Anglo American Plc, Billiton Plc, SA Breweries Plc, Liberty Plc and Dimension Data Plc. This handful of companies represents over half the valuation of the JSE, so they are likely to continue to dominate deal-making in future.
The fourfold increase in outward or offshore investment reported in 2000 was sustained in 2001. This is a consequence of the number of big SA companies having their primary listing on foreign stock exchanges. Yet it is not true outward investment, as the capital is flowing not from SA, but from the domicilium of the listed company - typically London.
Inward investment to SA continues to slide from the position where, not many years ago, outward and inward investment were balanced. From 1994 to 1998, the rate of growth of inward investment matched that of outward investment, but it has fallen back each year since.
Even though the black economic empowerment movement remains one of the most important sectors for M&A activity, since 1998 it has been awaiting new direction. Government and the Black Business Council are expected to provide this soon. The nature of black empowerment has irrevocably changed from minority stakes in large listed companies in favour of management control of smaller, unlisted companies, as well as joint ventures and strategic alliances in which values are often not announced.
There has been a steady reduction in the value and importance of unbundling in M&A over the past three years. In 1999, unbundling accounted for nine of the year's largest deals, but in 2000 this shrank to four of the year's 17 megadeals. In 2001, there was only one megadeal that primarily involved an unbundling.
Share buy-backs, though still relatively new, are a popular method of corporate restructuring among listed and unlisted companies alike. Yet their value has declined since 2000 and the average deal value is low compared with other types of deals. Share buy-backs were permitted for the first time in 2000 after the amendment to the Companies Act in 1999. They are seen as a means of improving earnings per share and thereby strengthening a share's valuation.
Government's promises that 2001 would be the year of privatisation and add R18bn to the public coffers proved empty. Though there were more deals in 2001 than in 2000, the value was less than one-tenth of the expected proceeds. Worse still, early in 2002 it became clear that yet another partial privatisation deal had gone sour, reminiscent of the unfortunate experiences of Sun Air and Aventura. Government bought back the 20% stake in SA Airways previously sold to strategic equity partner Swissair .
Contested or hostile bids have become more common in SA since Nedcor's hostile bid for Stanbic in 2000. AngloGold was involved in two. It ultimately withdrew from its bidding war with Harmony Gold for Freegold, to focus on its bidding war with Newport for Normandy Mining. After twice increasing its bid, AngloGold again withdrew as it felt the bid price was too high.
Outlook for 2002
There are few signs of any reversal in the downward trend in the value of mergers and acquisitions . Global statistics indicate a further 20% reduction in the value of deals announced in the first quarter of the year. Several of the large international corporate advisers are cutting staff numbers. It's another trend that's likely to continue for some time.
Despite signs that the influential US economy is starting to pick up, it seems unlikely that its previous vibrancy will be re-established before the end of the year. This is particularly true because of concerns about world peace, stemming from a general concern about the direction of international terrorism, but focused on the volatile Middle East.
In SA, there must be questions about how much longer the companies that have taken their primary listings offshore can be classified as truly SA companies. Without their deal-making counting as part of the local M&A market, the value of deals recorded in 2002 will fall. Black economic empowerment deals have given some spark to 2002, but there are no other obvious contenders to drive deal making in SA. The downward trend is set to continue.
NOTE TO TABLES
The tables include a breakdown of the professional advisers who facilitated the M&A activity recorded in this calendar 2001 survey. These lists are drawn exclusively from logos appearing on corporate announcements published in the national press in 2001 indicating the capacities in which the various advisers have acted, and consequently does not purport to be exhaustive. Where a transaction has been cancelled before going to press, we have removed the transaction from our lists, even if this was solely the result of regulatory intervention, and the advisory work had already been completed.
In compiling the tables we have included the total value of the deals in which more than one adviser was involved, which results in double or even multiple (in some instances) counting of individual deals, unless it is clear that one of the advisers only worked for one of the parties to the deal.
Again, this is only an indication and does not necessarily reflect the relative contribution of each adviser to the total pool of transactions.