Contrary to what many people may believe, mergers and acquisitions are happening quite regularly across different industries, jurisdictions and business sizes in South Africa. Not all of the deals are made public or make big news, as it is usually only the ‘big name’ deals that tend to reach the mainstream media.
This is according to Isaac Chindotana, Lireas Portfolio Manager, who says, “Taking the insurance industry as an example, a number of mergers and acquisitions (M&A) have been happening and this has been seen across the entire insurance value chain: brokers, Underwriting Management Agencies (UMAs) and insurance companies. The past few years have seen more high profile M&A activity in the broker space, in some cases even extending to operations outside South Africa’s borders.”
He comments, “Most role players in the short-term insurance industry are faced with uncertainty, limited organic growth and various other challenges that may be partially absorbed or overcome through a merger or acquisition. Further to this, a number of players in the market are holding large amounts of excess capital that is available for deployment, further creating appetite for M&A activity.
“In the deals that Lireas Holdings – as a strategic investment company for Hannover Re Group Africa - has done with its partners over the years, we have observed some of the benefits and value unlocked out of merging or acquiring businesses. The current environment is therefore one that would encourage and in some cases necessitate mergers and acquisitions, rather than not.”
Chindotana says the UMA space, which provides specialised insurance products and services to brokers within specific lines of business, has also been quietly active in the past few years, although with less prominence than the larger brokers and insurers. “As a strategic investment company for Hannover Re Group Africa, Lireas Holdings has been involved in a number of very successful merger and acquisition deals involving UMAs, especially over the past five to 10 years. When businesses come together, it is usually as a result of voluntary and strategic moves to achieve certain business objectives.
“However, it is also not uncommon for businesses to approach a suitable buyer of their business as a way to ensure their survival when faced with challenges. At the extreme end of the M&A activity spectrum, we also find businesses that have been acquired against their will in hostile takeovers.”
Chindotana says that, disregarding the risks or potential downside associated with mergers and acquisitions, the potential benefits or drivers for such deals are generally as follows:
- Synergies – The potential efficiency gains achieved through sharing resources across products and increasing profit margins in the combined entity can create a major attraction for consolidation.
- Growth – Mergers and acquisitions also help to improve operating scales, access to other markets, distribution channels, niche lines of business and customer bases. A number of players in the South African financial services arena have acquired businesses in lucrative emerging markets where these businesses are expected to grow faster than South Africa in coming years.
- Diversification or sharpening business focus – Some organisations may choose to acquire another company in an unrelated industry to protect themselves from any downturns in their core industry’s performance. On the other hand, organisations seeking to sharpen focus often merge or acquire companies that have a deeper market penetration in a key area of their operations.
- Response to a competitive and/or changing landscape – Organisations are sometimes better off combining forces to meet challenges that they would struggle with separately. The increasing compliance and regulatory requirements in the financial services space would encourage consolidation.
- Supply chain control (vertical combinations) – As a strategic move, a business may choose to buy one of its suppliers or distributors to achieve cost savings in its business or more closely control the chain. For example, in jurisdictions which allow this, some insurance companies have bought into brokerages in order to have control over product distribution channels.
- Management of competition – M&A deals are sometimes specifically carried out to eliminate future competition or gain control of a competitor’s potential business advantage.
