In the myriad of conversations about African tech, mergers and acquisitions aren’t usually leading topics – and understandably so too. The ecosystem is still in its early stages, startups aren’t attractive value-wise as standalone entities and funding is still very small compared to other markets (African tech startups raised $560 million in 2017 compared to the $84.2 billion raised in the US).
Still, there is way more M&A activity than we tend to realise. In Nigeria, micro-discussion site, Yarnable, was acquired by MobiQube and Le Proghrammeen as early as 2011. In South Africa, acquisitions were already happening as early as 1999 with VeriSign’s $575 million acquisition of certificate authority firm, Thawte. In more recent times, Ethiopian developer marketplace startup Gebeya acquired developer training startup Coders4Africa while Nigeria’s Zinox Technologies acquired Nigerian ecommerce startup Konga. The list goes on.
What M&A looks like in Africa
However, there are some important trends to note with African M&A deals. Firstly, they seem to be driven largely by value-adds acquirers can bring on top of their existing business. A great example of this is Nigerian ecommerce startup Konga’s acquisition of mobile banking startup Zinternet in 2015 to build out its proprietary payment platform KongaPay. Another example is BitPesa’s (Kenya) acquisition of Spain-based money transfer startup TransferZero.
Secondly, African M&A deals are exceptionally secretive. Except you’re on the inside or knows someone that knows someone, it’s hard to find any information about African M&A deals. Most acquisition announcements do not disclose specific figures and it’s hard to tell why these deals are even happening in the first place (except where it’s obvious – like the Konga/Zinternet deal). It’s also hard to know if a deal is a genuine opportunity-driven acquisition or a distressed sale (due to underperformance or shareholders demanding liquidity).
“I would say that we are starting to see a few more “secondary” – sale of shares versus investment – transactions, but at least some of these are distressed sales,” said Paul Cook, Managing Director of South African VC firm, Silvertree Internet Holdings, in this Disrupt Africa article. “Also, there was a wave of investments in spaces like e-commerce that happened several years ago, and it’s now time for those investors to seek liquidity, so that’s driving some transactions.”
Another thing is that the regulatory, finance and compliance aspects of M&A deals in Africa are super complicated, especially if they are cross-border type deals. Here’s BitPesa CEO Elizabeth Rossiello, speaking to Disrupt Africa, on her startups’ TransferZero acquisition: “I’m not sure what the numbers are, but there are very few small African startups that have grown in the last few years to purchase an European payments company. It takes a lot of corporate governance, financing, compliance and legal work to complete an acquisition.”
How increased M&A activity can affect the African tech ecosystem
While increased M&A activity doesn’t necessarily ‘transform’ an ecosystem/market, they do signify a bubbly investment environment. That said, increased M&A activity could also signify transformation for companies or disruption of individual segments of the economy. For example, Disney acquiring 21 Century Fox would mean Disney can theoretically disrupt the streaming services segment since such an acquisition would allow it control the entire life cycle of a movie or TV show – from production to last mile delivery to the consumer (It recently said it will pull its entire catalogue off Netflix as it plans to launch its own streaming service).
In the African context, one of Interswitch or Cellulant acquiring the other could change the entire fintech landscape in Africa. Another example is Tanzania’s ZOLA Electric and Oola in the renewable energy segment. Of course, these conjectures are rooted in the posit that acquisitions in Africa are typically strategic rather than profit-focused due to the early-stage nature of the ecosystem.
The thing with M&A in Africa
Roughly a week ago, Ghana-based Nigerian investor Victor Asemota, tweeted: “Why are African corporations not acquiring African tech startups? They are not always meant to be market adversaries. It could be an easier path to acquiring great talent and innovative teams. It seems never to be on the radar of both entities.”
While there is no one answer to the question, Victor did make a great point of how the ‘status quo’ (corporates angling for monopoly and supported by regulators in forced mergers) didn’t do anyone any favors. It’s also one reason why Africa has such a low number of exits. In markets like the US, exits typically happen more from acquisitions than IPOs.
The benefits are there for all to see too. As Victor pointed out, these acquisitions could be a great way for African corporates to bring on great talent and innovative teams instead of trying to build competing products that don’t necessarily move the needle. Also, these big African corporates have better capacity to make these deals happen and the more exits investors and founders get the more investors/investment is likely to pour in.
Unfortunately, African corporates seem to lack this conviction. That may be rooted in the fact that these companies value the existing culture over strategy (which M&A is about), as pointed out by EchoVC managing partner, Eghosa Omoigui in this tweet.
There is lack of skill in making these deals happen as well. According to former M&A lawyer, Modupe Odele, this problem goes beyond tech to even the traditional sector where there have been historically low M&A activity. Also, the bigger portion of the African economy is made up of small [and] informal businesses which translate to too few big companies capable of making these deals happen.
When it’s all said and done, there will always be a case to be made for M&A in Africa. If the IPOs are not happening (thanks to our illiquid stock exchanges) then at least the acquisitions and PE buyouts need to start happening [much more frequently]. That in itself may not take Africa to the proverbial promised land, but it will at least get milk and honey flowing into the land.
P.S: I am actively looking to engage in conversations around this subject as well as consumer internet in Africa. If you’d like to have a chat, call or even coffee, do reach out to me on Twitter at @TheAkindare or send me an email: firstname.lastname@example.org.
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