Surge in mergers, acquisitions forecast

Zimbabwe could see a rise in mergers and acquisitions (M&A) activity this year, driven by increased foreign investor interest exploring opportunities under the African Continental Free Trade Area (AfCFTA) and the attractiveness of mergers for firms seeking to adapt and remain competitive within this integrated trade environment.

With Zimbabwe’s post-election period underway, a slight increase in local mergers is expected, according to an analysis by the Competition and Tarriff Commission (CTC).

This follows a period of foreign investor caution, but with the political landscape clearer, they are now poised to explore acquisition opportunities.

“With the commencement of the post-election period, it is expected that there will be a slight uptick in local mergers,” said CTC.

“Foreign investors, who were previously adopting a ‘wait and see’ approach, are now poised to explore opportunities for acquisitions. Businesses believe that merger transactions in many cases are the best way to keep up with the ever-changing market developments and allow them to transform faster than otherwise feasible,” the commission added.

“Also, as firms continue to realise the changes that are going to come through the African Continental Free Trade Area this can also render mergers attractive for firms to reinvent themselves to stay ahead and relevant in this trade integration agenda.”

According to PwC (2024), global mergers and acquisitions outlook, mergers are anticipated to increase in 2024, signalling an end to one of the worst bear markets in a decade.

This optimism is based on the recent improvement in the global financial markets and the pressing strategic need for companies to adapt and transform business models.

Analysts view mergers and acquisitions as a strategic response to the ever-evolving market.

The transactions can expedite transformation and enhance competitiveness within the AfCFTA.

As firms grapple with the upcoming changes brought by trade integration, they argue mergers are an attractive option for reinvention and staying relevant on the global stage.

However, some analysts, citing a United Nations Conference on Trade and Development (UNCTAD) assessment of nations likely to benefit from AfCFTA, argue that economies like Zimbabwe might require investment in greenfield projects (entirely new businesses) instead. They express skepticism about M&A’s ability to make local firms competitive. Concerns include a potential lack of flexibility in pursuing regional goals due to entrenched, old business management styles.

They suggest newly formed M&A entities might inherit these outdated practices. On top of that, the relatively small size of local companies raises concerns about their ability to compete effectively even after merging, according to these analysts.

A UNCTAD study highlights that Egypt, South Africa, Nigeria and to a lesser extend Algeria are projected to capture around two-thirds of the benefits from AfCFTA.

M&A activity can also be hampered by legacy issues that can cast a long shadow over the merged entity’s operations. These issues can encompass a variety of burdens, such as outstanding debts, unresolved legal issues and a tarnished brand image.

Merging with a company struggling with high debt can strain the new entity’s financial health. Legal entanglements also lead to costly distractions and delays. Similarly, a negative brand reputation can be difficult to shake off, potentially impacting customer perception.

“While mergers and acquisitions are expected to increase, we should not rely on it to boost Zimbabwe’s competitiveness within AfCFTA,” said, an economist specialising in regional trade. “Greenfield projects that embrace innovation and modern management practices could be a more effective strategy in the long run.

“For instance, I see the Manhize steel plant in Chihvu a better investment than ZISCO.”

Dr Charles Rugeza, a trade policy expert, said AfCFTA presented a tremendous opportunity, but for economies like Zimbabwe, it might not be about mergers and acquisitions.

“Instead of simply combining existing companies, we should consider fostering entirely new businesses that embrace innovation and modern management practices from the ground up. This approach could be more effective in creating companies that are truly competitive within the AfCFTA framework. Otherwise, we risk simply perpetuating outdated business models that hinder regional integration efforts.

Currently, the biggest trading partner for Zimbabwe’s trade is South Africa, constituting about 45 percent of the Zimbabwean exports while the country imports about 41 percent of its imports from South Africa. Some of the Zimbabwean exports go to United Arab Emirates (UAE), China and Mozambique.

For Zimbabwe to benefit from the AfCFTA, the country should diversify its trade and markets within the region, according to CTC. This involves identifying target markets, understanding tariff elimination, adapting to trade preferences and diversifying products.

In addition, the country should ensure quality compliance, improving infrastructure, promoting trade facilitation, conducting market research, building stronger trade relations, participating in trade exhibitions, investing in digital platforms and seeking government support.

“By implementing these strategies, Zimbabwe can enhance its competitiveness, reduce reliance on a narrow range of commodities, and capitalise on the opportunities offered by the AfCFTA for economic growth and sustainability. Africa as a whole should also work on removing non-tariff barriers to trade to ensure goods can move smoothly in the region.

The CTC has identified a key challenge for Zimbabwe as lack of diversification in its export base.

The CTC notes that exports are concentrated in just a few product categories and markets.

To address this, it recommended a strategic shift towards product and market diversification.

Currently, Zimbabwe’s reliance on exporting unprocessed commodities like minerals and agricultural produce contributes to a negative trade balance. To achieve a positive trade balance within Africa and regional economic communities, the CTC emphasises the need for continued import substitution policies.

The strategy should be coupled with efforts to increase exports of value-added and manufactured goods.

By empowering SMEs, Zimbabwe can explore new markets and unlock its full export potential.

-herald