African M&A down, but plenty of opportunities remain

The deals market in Africa will be slower this year than in 2017, but the region’s financial services sector is on the rise and looking to invest in technology, according to a new report.

Mergers and acquisitions (M&A) across financial services in Africa and the Middle East will drop by over USD 20 billion in 2018, according to a report by international law firm Baker McKenzie, with input from Oxford Economics.

The Global Transactions Forecast for the region’s financial services deal-making predicted USD 9 billion in deals in 2018, down from USD 29.5 billion in 2017, but that does not necessarily mean doom and gloom for the business climate across both regions, but rather reflects the lack of any super deals this year. Nearly half of last year’s total came from one deal, the USD 14 billion merger between National Bank of Abu Dhabi and First Gulf Bank which formed First Abu Dhabi Bank.

“The decrease in M&A in the financial services sector in Africa is due mainly to economic and political instability, a lack of diversification, the risk of corruption and generally poor business climates across the region,” said Wildu du Plessis, head of the firm’s financial industry group. “The willingness and ability of governments to reform their legislation so that it is more investor-friendly, and to deal with bloated fiscal balances, is key to future growth.”

Financial services growth is dependent on investment in technology and innovation. The continent’s lack of traditional communication and banking infrastructure has made it the front line for the development of financial technology (fintech), more so than other regions, and financial institutions need to find ways to stay up to date.

Jeremy Pitts, global chair of Baker McKenzie’s financial institutions group, highlighted this need, saying: “Legacy IT systems constrain the ability of incumbent banks to innovate as these system are incompatible with the demands of artificial intelligence and big data. New entrants have a serious advantage, so alliances between incumbent banks and fintech start-ups are often the best solution.”

However, these developments are not necessarily bringing the benefits that they should to Africa itself. “The opportunities presented by the rapidly developing financial services sector are mostly driving outbound, and not inbound, investment,” said du Plessis.

“The growing need for technology innovation in the financial sector in Africa has seen domestic banks make significant investments in technology companies.”

With M&A value worldwide anticipated to rise to USD 616 billion this year, a 25% increase on 2017, driven by low interest rates, technological developments and regulatory pressure, there should be a positive environment in which investors and deal-makers can operate.

As Africa’s middle class grows, there is an increasing market for financial services growth and pushing investment by financial services in the technology sector.

“This increasing demand will most likely lead to solid growth in the sector beyond the next few years,” du Plessis adds.

Last November, the firm issued a Global Transactions Forecast for deal-making across all sectors in South Africa and Nigeria, which anticipated an improved 2018 for both of those countries.