Merger and acquisition values in SA reach record highs in 2005 though deal numbers drop

Deutsche Securities takes top position as the leading investment adviser and sponsor in 2005 while Webber Wentzel Bowens takes top position in the legal adviser category

Johannesburg, 4 April 2006: Merger and acquisition (M&A) values in 2005 rose 63% to R269,1 billion (2004: R165,5 billion), according to the 15th annual Ernst & Young Mergers & Acquisitions: A Review of Activity. The number of reported deals captured in the Ernst & Young research decreased to 744 from 822 in 2004.

The number of mega deals – those in the category of R5 billion and more – rose to eight, compared to the previous year, in which five deals in the R5 billion-plus category were recorded. The value of the mega deals totalled R141 billion, four times the figure of R35 billion in 2004, and more than double the R54 billion reported in 2003. Four of the mega deals reported in 2005 made it into the Top 20 largest transactions reported since Ernst & Young started its review of M&A activity 15 years ago.

South Africa tracked global trends in 2005, with international M&A values the most robust since the turn of the millennium - reaching $2,7 trillion, up from $2 trillion in 2004.

The 15th Ernst & Young review also focuses on Black Economic Empowerment (BEE) deals, with 238 BEE deals with a combined value of R56,2 billion being reported in 2005. The number of transactions in 2005 dropped slightly against the 243 recorded in 2004, but the combined deal value in 2005 was higher than the previous year’s R49,9 billion.

The Ernst & Young M&A Review is an independent analysis of all merger and acquisition activity in South Africa. It is a reference of record for the corporate finance, legal, brokerage, academic and media communities, and it has provided the longest-running overview of the industry in South Africa.

Deutsche Securities was the leading investment adviser in terms of the value of the transactions on which it advised. Placed second and third respectively were Rand Merchant Bank, 2004’s leading adviser, and Merrill Lynch.

Among the legal advisers, 2004’s number one, Edward Nathan, was overtaken by 2004 runner-up Webber Wentzel Bowens. Third place went to Deneys Reitz, which moved up from its 13th position in 2004.

In the sponsors’ category, Deutsche maintained its number one position, while Merrill Lynch moved up two places into second place. Third place went to Rand Merchant Bank, which dropped from second position in 2004.

The theme of this year’s publication is the role of SA companies in the global arena. The 2005 Ernst & Young M&A review records that three of the four biggest deals were concluded with LSE-listed companies included in the FTSE index

Johan Kritzinger, MD for Ernst & Young Corporate Finance, says that the growing appeal of SA companies and the increasing activity of local companies in the global arena can be attributed to an improvement in SA’s political and economic risk profile, a relatively stable currency and more relaxed exchange controls. “SA is not where it wants to be yet, but enormous progress has been made.”

Dave Thayser, a Director of Ernst & Young Corporate Finance says: “SA companies have truly joined the international community. But with this global business passport comes a hefty responsibility, and the 15th M&A Review has outlined some of the issues impacting local companies wishing to increase their geographic footprint.”

Thayser says that, closer to home, the issues related to the draft Codes of Good Practice on Broad-Based Black Economic Empowerment and a number of other regulatory issues remain unresolved, and this results in ongoing uncertainty in the corporate environment for the advisory community and clients. He does however believe that it is encouraging to see that Government has made pleasing progress in other areas, especially when it comes to ensuring a more equitable and conducive tax regime, especially for Black Economic Empowerment (BEE) transactions.

“Although BEE remains one of the largest drivers of corporate activity in the SA economy, the BEE process is maturing. This is depicted by empowerment companies participating in interesting and sometimes controversial M&A deals of their own, and empowered companies swapping out or adding to their empowerment partners,” adds Thayser.

Looking forward to the current year, Thayser says the two major inward investment deals announced in 2005 - Barclays/Absa and Vodafone/Venfin – potentially represent the beginnings of a new era of investment into South Africa.

“They are both of a magnitude that should send strong signals of confidence to other potential investors. These two deals also carry with them interesting implications for South Africa’s role as a desirable entry point for doing business in sub-Saharan Africa. This role has been spoken about as a possibility since the first democratic elections in 1994, but the Barclays/Absa deal puts flesh on the bones of that vision,” adds Thayser.

He also notes that buoyant economies and stock markets lead to investor confidence, which in turn leads to increased M&A activity. “Purely domestic M&A activity is therefore likely to be fuelled by these factors.”

Thayser says: “At some point in any cyclical upswing of M&A activity a period of excessive enthusiasm is reached. This is the point at which too much is routinely paid to acquire targets of dubious value, often funded by the issue of cheap acquirer paper. But according to research conducted by JP Morgan and Thomson Financial, cash was used to fund 50% of acquisitions in the US in 2005, whereas at the height of the last boom the use of cash had reduced to 30%. So it would appear that sanity is prevailing so far in this current upswing.”

Download a complete copy of Mergers & Acquisitions: A Review of Activity for the year 2005

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Issued by:
Fathima Kolia
Ernst & Young
Tel: +27-11-772-3151
Cell: +27-76-662 -2842
Fathima Kolia

On behalf of:
Dave Thayser
Ernst & Young
Tel: +27-11-772-3000
Dave Thayser