Consistent trend in M&A activity regardless of uncertainties

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BY ANTONY MUTUNGA

During the end of the 19th century, the world was introduced to something spectacular in the corporate scene not knowing it will become one of the most important applications in the business world, Mergers and acquisitions (M&A) started making its presence felt around the globe. Starting off with the first wave of mergers and acquisitions that only involved horizontal mergers, it has evolved to the current stage which has seen companies not only move from horizontal mergers but also include takeovers.

The increased competitiveness in the business world was a major reason for its growth, making it a widespread application by many organizations. Despite its fast growth, M&A did have its low moments especially in the start of the 20th century. During the period most of the deals ended up making major loses after merging.

For instance, in the United States, American Online (AOL) purchased Time Warner for US$164 billion and in one year they ended up reporting a loss of US$100 billion making what is known as the ‘biggest mistake in corporate merger history’.

It was a dark time for M&A activity as it hit an all time low between 2001 and 2003; however this did not last as they recovered from this decline thanks to some mega deals around the globe. It would see M&A become a more widespread application, in the business world, than before. This can be seen through the rise in total value of such transactions from $83 billion in 2003 to $115 billion in 2004. In the end of the Sixth wave, the world was plunged into recession after the financial crisis occurred, drying up credit thus leading to a reduction in M&A activity.

However, it did not last long, as the world started recovering; there were low interest rates and credit once again thus making M&A activity to become popular once more because businesses focused on growth and the competition in their industries.

Entering the Seventh wave of M&A, which began in 2011, things have been turning around. For example, one of the biggest social media acquisitions took place during this wave as Facebook acquired Whatsapp for $22billion in 2014. 2015 was also recorded as the best year for M&A activity. The total value of transactions in the year was worth $4.7 trillion, the highest seen since the total value of $4.4 trillion back in 2007 during the Sixth wave. Ever since the start of the seventh wave, the overall activity of M&A has been on a rise.

In the second quarter (Q2) of 2017, the global activity of M&A is expected to stay active as it was in the first quarter (Q1) of the year in terms of the value of the transactions. The value of the deals in Q1 of 2017 had increased by 8.9% of that of the first quarter of 2016. Despite it being a volatile period when it comes to market growth, there was an increase in activity as the organization came to terms with the fact that the world had changed and there was a new norm. Most organizations henceforth have started believing in merging and acquisition compared to organic growth and cutting costs as a means of obtaining consistent positive results.

However, some still believe in holding off on M&A activities due to major uncertainties being felt around the globe. For example, the new administration in the U.S has many companies holding off on major decisions as President Trump looks to come up with new policies. If the newly elected President of the U.S decides to live up to his word on reducing corporate tax then it will definitely be good news for companies, as they would have more capital to spend on M&A. Despite this being advantageous to organizations, in the short run most of the companies are most likely to wait until they are certain of the tax reforms.

Apart from the new administration in the West, there is also the matter of antitrust regulations coming back into action. As competition keeps reducing, it leads to low growth causing the government to step in so that they restore fairness and ensure growth. This eventually causes a decline in M&A activity as major deals end up being blocked for the sake of fair competition in the different industries. This ultimately discourages companies from M&A activity until the regulations are changed.

In addition, last month saw the start of the Brexit negotiations, which may have a major impact on the global M&A activity. The final agreement between the European Union and the United Kingdom will affect many companies depending on what they agree on. M&A activity is declining as companies wait to see what deal PM Theresa May will make at the Brussels. She will probably have the complaints from domestic companies, that they are being targeted by foreign takeovers, fresh in her mind, which will prompt her to look for ways to block out the takeovers. This would eventually reduce the number as well as the value of M&A deals.

2016 included a number of administrative changes, throughout the world, that left the world in shock and 2017 also being a year that includes several general elections in a number of countries may end up being a repeat of last year. General elections bring up a lot of uncertainties that cause companies to shy away from major decisions as they await the outcome. For instance, the M&A activity was spiraling prior to the French presidential elections as investors were uncertain over who will be the next President and the possibility of France exiting the EU as well.

On the contrary, the effect is quite different in other regions. For example, Kenya is heading towards general elections come August this year but the trend of M&A activity is still expected to rise according to Bernard Musyoka, Partner and an expert on Mergers and Acquisitions at MMC Law Africa.

“It is expected that the upward trend on the number of mergers and acquisitions in Kenya and in the region shall continue. However, this is also subject to certain enabling factors such as stability especially following the General Election that is coming up in August and a friendly regulatory environment,” he adds.

M&A activity seems to be on the increase and the value of the deals is also expected to increase in Kenya with major ones looming in the air. For instance, the biggest lender in terms of assets, KCB Group is looking to acquire 70% stake in the struggling National Bank of Kenya (NBK). The acquisition is possible thanks to the financial woes that NBK is facing as a result of the interest rate cap and problems when it comes to corporate governance. The acquisition which, is expected to be done through share swap, would see the banks increase their combined assets to Sh750 billion.

Kenya Commercial Bank (KCB) approached the majority shareholders of NBK, National Treasury and NSSF, on acquiring the stake and in turn increasing their shares in KCB from 23.6% to 30% if the deal is approved.  This deal would also see major shareholders have their shares changed from NBK shares for KCB shares. This will eventually make KCB one of the largest banks in East Africa.

Global M&A activity is expected to keep its upward trend for the better part of 2017 despite the several uncertainties. As managers get used to the new norm, which entails uncertainties, most will look to mergers and acquisitions to increase their growth in the competitive industries. Regardless, only time can tell what is in store for M&A activity in Q2 2017 as compared to Q2 2016; an upward trend, a constant trend or a decline?