Global firms consolidate to weather economic storms

IN the wake of cyclical global headwinds, the universal business landscape is witnessing a deliberate shift in business models to sustain growth. Global firms are increasingly turning to mergers and acquisitions (M&A) to navigate persistent economic challenges and bolster their performances in a highly integrated and hyper-competitive global market.
Global technology giant Meta Platforms (formerly Facebook, Inc.) has acquired 91 other companies to date, including messaging platform WhatsApp for $16 billion.
In 2022 alone, a total of 57 M&A deals were announced in South Africa, resulting in a total deal value of circa $16.8 billion. Of these 57 M&As, the deal secured between MSC Mediterranean Shipping Co SA and Bollore Africa Logistics was the largest, valued at $6.404 billion.
Zimbabwean financial institutions embrace M&A
In Zimbabwe, agile local financial institutions have since embraced M&A to strengthen their balance sheets and competitiveness in a broadening and fast-paced global playing field. This trend is exemplified by FBC Holdings’ recent acquisition of Standard Chartered’s Zimbabwean operations and the landmark merger between CBZ Holdings (CBZ) and First Mutual Holdings Limited (FMHL), which aims to leverage ‘scale and stability’ to unlock Africa’s unlimited financial market opportunities.

The wave of M&As is not just a local phenomenon, it’s a global trend.

When properly executed, it has been proven that strategic mergers and acquisitions are a viable business strategy for firms to consolidate their market share, and in some instances, to save firms from going under.
Benefits of mergers
M&A makes companies robust and capable of enduring tough times. The global operating environment is a complex one and strong, combined companies perform better in constantly changing, global, regional, and local markets.
As the acquiring company’s revenue streams increase after an M&A, the organisation can diversify the risk across those revenue streams.
Analyst Enock Rukarwa said companies were taking the mergers and acquisitions route because scaling organically had been difficult.
“Synergies being birthed out of these transactions could create economies of scale in business operations and bargaining power on future investment prospects,” he said recently.
In 2008, the Bank of America bought Merrill Lynch in an all-stock deal valued at $50 billion. The announcement came as Merrill Lynch was under immense pressure to find a stable merger partner after its liquidity “evaporated,” and its share price plummeted. With the merger, the bank hoped to rid itself of its toxic assets and improve its business.
M&A brings economies of scale by helping companies increase access to capital, enhance production volume, lower costs, improve bargaining power with distributors, and much more.
Analyst Lloyd Mlotshwa believes the country desperately needs larger corporations to substantially drive aggregate economic activity.
“Given the limited size of the formal economy in Zimbabwe; mergers to consolidate balance sheets and consolidate different customer bases to create scale are critical,” he said.
The limited size of Zimbabwe’s national population and high levels of informal businesses restrict organic growth, prompting businesses like CBZ and FBC to seek scale through M&A.

“It looks like we are in a period of consolidation…businesses are seeking scale because of the economic headwinds in the environment,” Ranga Makwata, a local investment analyst, told The Financial Gazette recently.

“It seems they believe that they should have a bigger balance sheet to survive and compete,” he said.
He said the benefits of consolidation seemed to be more apparent in the financial services sector.
“Specifically, with the recent transactions, the companies are trying to create a big institution to be able to support the local economy.”
Country risk and sanctions imposed by some Western governments have created several problems for Zimbabwean businesses seeking capital.
“So, local banks are looking for scale to finance local projects, but also to be able to bid for support from foreign institutions.
“In such scenarios, it is better to present bigger and more stable institutions,” Makwata said.

The potential for synergies further incentivises consolidation, as combining operations can unlock economies of scale, bargaining power, and opportunities for product diversification.

Larger financial institutions are seen as crucial for driving economic activity and supporting diverse sectors, aligning with national development aspirations.
Mlotshwa emphasised the importance of creating efficiencies and alignment within the larger structures formed through M&A to ensure real value creation and avoid future demergers.
The wave of M&As is not just a local phenomenon, it’s a global trend. PwC’s Christopher Sur highlighted recent improvements in financial markets and central bank policies, which are boosting investor confidence and creating a more optimistic outlook for 2024 compared to the low point of 2023.
“Current market conditions ─ combined with necessary ongoing initiatives such as digitalisation, sustainability, and workforce challenges ─ put pressure on financial services players to accelerate their transformation to remain relevant and profitable,” Sur said in a recent note.
“Besides internal measures, M&A continues to be an essential part of the transformation journey, especially as organic growth faces severe challenges in the current macroeconomic environment.
M&A-related transformation steps may include acquisitions to enhance capabilities and drive future growth through economies of scale and scope.
“Alternatively, divestitures may help to improve operations and recalibrate business models,” he added.
However, Sur anticipates well-analysed transactions to navigate the complex regulatory landscape and risk-averse profile of the industry.