Half of the business owners in South Africa consider the acquisition of new technology or an established brand as key drivers for growth through mergers and acquisitions (M&A), according to the latest Grant Thornton International Business Report (IBR) 2012 findings.
“Investors are still cautious and they want to secure their future earnings by investing in companies that offer more solid growth potential,” says Steven Kilfoil, director, Corporate finance at Grant Thornton Johannesburg. “Established brands and innovative technology are most likely to yield sustainable returns.”
The Grant Thornton International Business Report (IBR) provides insight into the views and expectations of 12,000 businesses per year across 40 economies. This unique survey draws upon 20 years of trend data for most European participants and nine years for many non-European economies.
The results from the 2012 report also show that of those South African companies seeking to expand through acquisition in the next three years, 46% expect to do so through a cross-border transaction, a rise from 31% in 2011 and 41% in 2010.
When it comes to financing of acquisitive growth, 70% of South African respondents indicated that they would fund such activity through retained earnings. This supports Finance Minister Pravin Gordhan’s observation during his 2012 National Budget Speech in February, that many firms have accumulated large cash balances instead of investing them or distributing to shareholders.
Kilfoil states that SA investors are more cautious these days as a result of global economic concerns and local political uncertainty. He adds that private equity transactions are becoming less lucrative as in tough times, fewer companies are truly cash generative enough to appeal to PE investors, or these companies are becoming increasingly averse to financial gearing which also renders them unattractive to traditional PE investors.
“Companies should be taking a less traditional approach to private equity transactions,” advises Kilfoil. “Instead of simply adding debt to the balance sheet to leverage return on investment, private equity investors will need to look at how they can control other variables within target businesses to lower the targets business risk, thereby increasing future risk weighted returns.”
In South Africa however, the proportion of businesses seeking to grow through acquisition has declined from 41% in 2011 to 32% in 2012. The BRIC economies also revealed a decline in respondents seeking to grow through acquisitions from 44% in 2011, down to just 35% in 2012.
The BRIC economies consider – like their South African counterparts – opportunities in new technology and established brands as key drivers for M&A expansion. The global statistics indicate, though, that the core factors which drive growth by acquisition are access to new geographical markets (58%) and a need to build scale (55%).
Globally 33% of companies seeking to expand through acquisition expect to do so through a cross-border transaction, a rise from 28% in 2010. In contrast, across the BRIC economies, international acquisition expectations have declined with just 22% of businesses in the region expecting to undergo a cross-border acquisition, compared to 2011 figures of 26%.
The IBR reveals that the proportion of global businesses seeking to grow through M&A, be it overseas or within their own market, has risen over the past two years from 26% in 2010 to 34% in 2012.
The IBR data also reveals lacklustre interest in key regions around the world in terms of appetite for making an acquisition. Only 28% of companies in mainland Europe indicated an interest in M&A activity in the coming three years, 25% in Asia Pacific and companies in the troubled economies of Greece, Ireland and Spain responded with only a 16% interest.
“Despite the worldwide economic challenges, the results show that overall global business appetite for M&A has improved markedly over the past year,” says Kilfoil. “One would imagine that SA and the BRIC regions are lagging global trends, possibly still catching up, and we’ll hopefully see renewed interest in these regions in the year ahead.”
Notes to editors
The Grant Thornton International Business Report (IBR) provides insight into the views and expectations of over 11,500 businesses per year across 40 economies. This unique survey draws upon 20 years of trend data for most European participants and nine years for many non-European economies. For more information, please visit: www.internationalbusinessreport.com.
The research is carried out primarily by telephone interview lasting approximately 15 minutes with the exception of Japan (postal), Philippines and Armenia (face to face), mainland China and India (mixture of face-to-face and telephone) where cultural differences dictate a tailored approach. Telephone interviews enable Grant Thornton International to conduct the exact number of recommended interviews and to be certain that the most appropriate individuals are interviewed in an organisation which meets the profile criteria.
Data collection is managed by Grant Thornton International’s core research partner – Experian. Questionnaires are translated into local languages with each participating country having the option to ask a small number of country specific questions in addition to the core questionnaire.
IBR is a survey of dynamic organisations (both listed and privately held businesses). The data for this release are drawn from interviews with 3,000 businesses globally conducted in January and February 2012.
The target respondents are chief executive officers, managing directors, chairmen or other senior executives (title dependent on what is most appropriate for the individual country) from 40 economies primarily across five sectors: manufacturing (25 per cent), services (25 per cent), retail (15 per cent) and construction (10 per cent) with the remaining 25 per cent spread across all sectors.
Locally, 150 interviews are conducted per quarter, and 600 interviews per annum. The South African sample tends to cover the sectors mentioned previously.
Notes to editors
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