Victor Basta is chief executive officer at DAI Magister, a specialist bank focused on M&A exits and larger financing rounds. Prior to Magister, Victor was founder and managing partner of Arma Partners LLP; global co-head of Broadview prior to its sale to Jefferies, and an Adjunct Professor of Entrepreneurship at INSEAD, as well as past President of the UK/Irish Tech Tour
Mergers and Acquisitions (M&A) has long been a vital part of the global financial ecosystem, with the first deal dating back to the 1870s. Until recently Africa hasn’t developed enough companies of scale for successful M&A to drive highly profitable exits, with M&A on the continent accounting for only two percent of global deal value.
However, with Private Equity (PE) funding on the continent decreasing and, more importantly, a whole new crop of African tech-enabled growth companies now reaching continental scale, we are seeing the first indications of a successful M&A exit trend taking shape. To maximise the opportunity, African founders must already begin to prepare their companies to be “bought, rather than sold.” Getting exit preparation right is a proven route to both greater exit certainty and higher valuations, and makes even more sense for African growth companies, particularly in today’s markets.
The new normal
Much of the recent uptick in M&A globally is due to sharp declines in funding available. In both Europe and the US, “burn to grow” is no longer considered a viable strategy for attracting investors, and businesses seeking additional funding now must prioritise profitability and reduce cash burn. The days of “revenue growth at all costs” have passed, likely for a very long time. Consequently, a clear roadmap to profitability has become an essential tool for any enterprise that wants to expand.
This shift in sentiment has affected everyone, not just growth companies. A prime example is Disney, one of the bluest of blue chips. Despite finally surpassing Netflix in subscribers last year, Disney shareholders focused instead on how much the giant’s profitability suffered to achieve this, driving a sharp decline in its stock price and forcing a change of leadership. In a ‘2021 market’, impressive, sustained growth at scale such as Disney’s streaming service would have been richly rewarded. If the shift in sentiment can have this profound an effect on Disney in 2023, its impact on all other businesses is even greater.
This encapsulates the market today, where unprofitable growth is punished. Even start-ups at the earliest stages are now expected to present revenue and profits statistics, with capital efficiency and cash burn-rate key metrics that determine if they will be funded further.
The shift to M&A
Founders have quickly adapted, opting to restructure. In turn this has made them far more attractive to later stage PE buyers looking to acquire profitable companies. This is a major driver behind the increase in PE deals for growth stage companies, with the number of mid-market transactions rising 8% from H1 2022 to H1 2023 even as funding dropped by half.
The resurgence of M&A has alerted founders to the potential of securing a profitable exit through this route, as opposed to diluting their ownership through yet another (more expensive) funding round. Notably, when comparing the ratio of European funding rounds to M&A deals, we see that 67 percent of transactions have occurred through M&A so far this year, a sharp increase from 57% in 2022. Across Europe and also the US, 2/3 of the time companies are opting for high-value exits rather than more (and more expensive) funding.
The African landscape
In contrast, Africa’s M&A market is nascent. However, a noticeable tightening of available capital in the region compelling companies to explore options other than fundraising. In 2023, African growth companies have raised only $2.4 billion, a sharp decline from the $3.3 billion at the same point in 2021 and $4 billion in 2022.
Yet at the same time, the African growth ecosystem has matured. In 2015 to 2020, most fundraising efforts concentrated in the Seed to Series B stages. However, from 2021 to 2023, the focus shifted to larger growth-stage deals, typically $20 million to $50 million+. This trend reflects the maturation of the African growth ecosystem, where many companies have “grown up very quickly” in a very short period of time and are now at a size that makes them attractive for acquisition.
As a result, the first wave of M&A deals are already happening in Africa. Additionally, international buyers are keen on acquiring a presence in African or specific competencies, exemplified by BioNTech’s $550m acquisition of InstaDeep earlier this year.
We are seeing this real-time in our own practice, where half of the 12 larger African fundraising we are advising on involve some form of M&A, compared to zero at the beginning of 2022.
African sectors ripe for M&A consolidation
There are four growth sectors ripe for M&A activity: fintech, tech-enabled commerce, renewables and telecoms.
Fintech has been by far the most heavily funded sector in Africa. As a result, it has the greatest number of growth stage companies now large enough to be acquired as “continental platform acquisitions”. M&A is already starting, focused on geographic expansion, broadening product or service offerings, and extending a buyer’s regulatory footprint.
In this market, size is fundamental to driving margin increase. The larger the company, the greater the gross profit it can spread across a largely fixed cost base, increasing operating profit significantly. Also, it is always far more expensive to expand commerce offerings into new geographies; acquiring a national “champion” provides a ready-made profitable presence in any one key country or region. Finally, many tech-enabled commerce players are already offering higher-margin financing solutions, and greater scale enables them to make more money financing their most trusted customers.
Again, scale is critical for driving incremental margins, whether it be mini-grids, off-grid solar, or even in due course hydrogen facilities, while geographic diversification through M&A mitigates against currency fluctuations, political instability and regulatory risks. For many renewables companies, increased size through acquisition also means access to lower cost of financing and a lower bill of materials.
For many companies, extending beyond core telecoms services of voice and data is core to driving growth. However, both infrastructure and value-added services again become very profitable at greater scale, and deeply unprofitable at too small a size. For example, towers are highly capital intensive and require multi-tenant sites to be profitable. Additionally, capacity utilisation and lead times to build data centres and fibre makes M&A the fastest way to expand.
Make the right approach
So, what does all this mean for companies that qualify for an M&A exit? The biggest requirement is to prepare thoroughly for a successful exit, including identifying the right parties to approach and stage engagement with them to cultivate serious interest.
Founders should focus on cultivating potential buyers with clear synergies and who have the financial capacity to meet the expected asking price. This entails identifying the appropriate pool of buyers, a deep understanding of their position within the value chain and the ability to articulate the incremental value a smaller target would bring to their strategy.
The “best” buyers are generally 5-10 parties who already understand a potential target and are in many ways the most “natural” buyers. An engagement plan customised for each party nearly always makes sense and should happen over the 6-12 months well before any exit is planned. Engaging those “core” buyers only once a formal exit process starts makes it much harder for those buyers to really appreciate the strategic value of a potential deal.
Additionally, there should be a list of 10 to 25 potential buyers who, while not part of the core group, should logically be interested. Our general advice is for companies to categorise those buyers into “themes” or reasons for acquiring and define different outreach strategies for each category. For example, there may be a group of buyers who would logically be interested in a company’s embedded finance offering, whereas others might generally be attracted more to a company’s geographic footprint. Tuning the messages for each buyer category is critical to generating initial interest, again well before any proactive sales process starts.
Finally, a broader group with potential alignment but no confirmed interest should also be identified, and any engagement plan 12 months before exit should aim to increase awareness among these potential buyers, so they don’t hear about a company for the first time during a formal sale process. At its core, familiarity increases the odds of a successful outcome dramatically.
Nearly always what might seem like “premature” engagement with buyers is generally going to be far more effective than expected. For many companies, deals often happen in the run-up to a next funding round, before new money resets the exit clock and changes (sometimes dramatically) the required exit price, and so logically companies should plan buyer engagement in the 12 months before a next funding event. In practice, for many companies, that means exit prep needs to start sooner rather than later.
There are numerous other factors that drive a successful exit, for instance ensuring the company is perceived as the market leader (in something, somewhere), ensuring buyers fully understand how the company has “solved” the complexity of operating profitably in its sector, and demonstrating how a company will help a buyer drive even faster growth and better unit economics, all of which serve to compound buyer optimism.
All of the above is only a partial recipe for exit preparation, since the highest-value set of actions is unique to each specific company. A basic M&A prep template to customise would likely include the following steps: conduct a strategic review of the business, develop and evolve a company’s external positioning, refine corporate materials so that all elements (website, releases, deck, even board minutes) reinforce key messages, stress-test business plans and financial models to stand up to buyer due diligence, define and front-run key value risks in a deal, and engage potential buyers in stages, well before the company is “put up for sale.” It is also imperative companies set themselves up with the knowledge and discipline to develop a thoughtful, staged exit preparation plan. This oftentimes is best supported by a formal exit committee of the board.
Our experience over 20 years of doing such exercises confirms that companies regularly achieve greater certainty, and higher prices, doing this sort of preparation well before any sale process.
Preparation is a competitive advantage particularly in Africa
African companies generally must oversteer on exit preparation to achieve strong M&A outcomes. They are often “far away” from the best buyers, and many buyers generally have only superficial knowledge of even sizeable Africa targets to acquire. The ultimate goal of laying these foundations is to create awareness of a company’s attractiveness for the right reasons and develop serious interest from the best buyers over time.
We believe it is essential for a large group of successful African companies to begin preparing for successful exits. Founders that do this preparation will be ahead of the curve as the market shifts toward M&A and have the potential to maximise the value of their exit as a result.
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