Since the lifting of global pandemic restrictions, there has been a resurgence in tech sector M&A deal activity and fund raising in Africa. Growth investors are allocating more capital to African markets than ever before, though an increasing amount of that money is focusing on late-stage growth companies that are already approaching significant scale and success.

It is this tiering in the investment market, where large rounds and high value exits remain available but only for the largest, most established companies, that is fuelling the current rise in M&A activity in the continent’s tech enabled sectors and we see the number of M&A deals increasing in real time as larger companies acquire smaller ones to access new markets and products rapidly and efficiently.

Until last year, tech M&A was primarily driven by international firms looking to get a foothold in Africa. However, the tide is turning and there is now increased M&A activity between African start-ups. From MaxAB’s acquisition of Morocco’s WaystoCap, and even Piggyvest’s acquisition of Savi, companies are consolidating to solve some of the continent’s most pressing issues as well as capture new opportunities. This is particularly true of UK-headquartered power company Bboxx’s purchase of West Africa-based solar energy provider PEG Africa in a deal reported to value the combined firm at around $300m.

There has also been the rare acquisition of a US tech company by an African firm, with MFS Africa, Africa’s largest digital payments network, reaching an agreement to buy Global Technology Partners for $34 million. [1]

Large reference growth companies such as Flutterwave, Andela, Chipper, OPay, and MFS Africa have each raised at least $100 million in what has been a landmark year for African startups.[2] For many of these larger players, pressure to grow revenue and valuations makes it imperative to pursue smaller targets. As a result, so far most African tech M&A deals have been bolt-on acquisitions, with large players acquiring smaller companies, and as yet there have been no transformational transactions or mergers of equals (MOEs) in the African tech space, which will be needed to accelerate growth and enable companies to capture more of the total available market in a more profitable manner.

Reasons to be optimistic

Tech M&A opportunities are set to rise in the financial, healthcare, agriculture and energy-related services sectors as promising, but smaller players find it more challenging to raise capital at the valuations they expect. For many, the opportunity now exists to combine with a larger player who already has access to capital, and together position the combined company to raise $100m+ rounds.

Talent acquisition deals are also becoming more popular because as the ecosystem grows, competition for tech talent becomes tougher. This pattern means that startups with capital can save time and money if they acquire a smaller startup to integrate its talent, and talent itself becomes a source of value.

Changes needed in the Africa tech ecosystem for transformational transactions and mergers of equals

In our ongoing dialogue with players in the ecosystem, we recognise the growing need for consolidation. Many companies are investing money in parallel effectively to do the same things in the same market, for example to set up mobile wallets, organise supply chains, or generate valuable customer data on which to provide credit. There is strong strategic rationale for companies in the same or similar sector to contemplate joining together. There is an immediate benefit in terms of cost and investment savings, and two companies in the same market inevitably have more to learn from each other than either realises. Also, as companies compete in the same market, the cost of new customer acquisition, either consumer or SME, inevitably can only rise. Finally, a larger combined entity is far more likely to achieve higher profitability more quickly, which is increasingly being demanded by the biggest-name international investors.

However, key constraints still exist, and we’ve identified the following three principal issues:

1. Founder mindset. For transformational transactions to take place, a shift in mindset is required from startups, with one of the founders accepting they won’t be controlling the joint company and be willing to own a smaller piece of what will be a much larger pie, even on day one. Every successful start-up founder has to believe that they are well-suited to scale their businesses to become African and global champions. However, not all founders possess the experience, and many simply fall foul of timing or market conditions, all essential ingredients needed to build a multinational scaling enterprise, as well as design great products that customers need.
After a period of self-reflection, many founders discover that they are able to unleash the potential for growth and consolidation when they let go of the reins. They often find that they enjoy venture creation more than scaling. By transacting when the company feels “too corporate” and taking a non-executive board role, they will gain the freedom to pursue activities they are more passionate about. This is the exact same dynamic that operates in more developed tech-enabled markets, from Silicon Valley to Berlin, where 80%+ of successful exits are done via M&A rather than IPO, meaning that a combination of some form is a key ingredient for ultimate success.

2. Approaching the combination. When considering a merger, founders need to spend time getting to know each other, discussing common strategies and identifying value propositions that can increase growth. The first few interactions should not necessarily focus on the combination but rather on culture; the ability to craft a common vision, shared values, common challenges; and whether cooperating or merging leads to better solutions for customers. When there is alignment on these issues, the potential for a transaction can then arise naturally. with a clear understanding on how to approach relative valuations and the treatment of their balance sheets along with the associated complications.

3. The role of board members and large shareholders. Board members and shareholders should encourage founders to think about their own roles as the company grows, and what they can change to take the business to the next level of success. In addition, a key board responsibility is helping the CEO to think about a potential exit and ‘challenging’ him or her on what potential exits might make sense, whether by combining with a larger private player or a sale to a larger strategic. Regular discussions around the strategic landscape are critical. These conversations should include defining the main competitors and exploring how they are developing; assessing their products, services, and market position; and working out which strategic levers can encourage management to pursue better growth outcomes.

What we think may happen

Recent economic and market conditions have resulted in decreased valuations and a difficult fund-raising environment. In many tech-enabled sectors valuations are back to early 2020 levels, before the sharp rise in 2020-21, and this manifests for many companies as a 30-50% ‘haircut’ on the prices they would have expected a year ago. This puts pressure on both larger private growth companies, who are expected to fulfil investors’ expectations to capture a significant share of the markets they target while now solving for earlier break-even and cash conservation. It also puts pressure on smaller growth companies, who find that the ‘uplift’ in valuation they expected in their next round now is unlikely to happen.

In the near term, the focus is on stabilising the ship, but we believe it’s only a matter of time before the market dictates a jump in M&A activity across tech-enabled sectors. The natural question that is already being asked is around what happens next, as competitors also contemplate growth in a challenging environment. These conditions are likely to be catalysts for increased M&A activity. In addition, companies with limited cash runways will probably find it difficult to raise money and will be compelled to merge.

Companies should never wait until they are closing to running out of cash, or very unlikely to meet their investors’ expectations. For any business thinking about these issues, starting the conversation with potential partners well before they approach this point will enhance their ability to negotiate favourable terms for a merger or acquisition.

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