By Andrew Bahlmann
THE past 12 months have been a roller coaster for the Johannesburg Stock Exchange (JSE). As the world grappled with economic uncertainties, inflationary pressures, and geopolitical tensions, the JSE, like many global markets, experienced periods of significant volatility. However, amid the bearish market sentiment, some South African companies saw an opportunity to make strategic acquisitions, capitalising on lower valuations and setting the stage for future growth. This article delves into how these companies leveraged the downturn, the strategies behind their moves, and what this means for the South African economy in the coming years.
A challenging market landscape
The JSE, Africa’s largest stock exchange, has not been immune to the global economic challenges that have defined the last year. The market saw sharp declines in various sectors throughout 2023, driven by concerns over interest rate hikes, supply chain disruptions, and an uncertain global economic outlook. For many investors, the market’s volatility was a signal to adopt a cautious stance, with some choosing to divest from equities altogether.
Yet, for others - particularly corporates with a strategic eye - this environment presented a unique opportunity. Lower stock prices and depressed market valuations meant that potential acquisition targets became more affordable, enabling well-capitalised companies to pursue growth through mergers and acquisitions (M&A).
The remarkable recovery in 2024
As we moved into 2024, the JSE has demonstrated a remarkable recovery, defying the pessimistic outlook that clouded much of the previous year. Several factors contributed to this resurgence, including a stabilsation of global economic conditions, easing inflationary pressures, and a return of investor confidence. The JSE All Share Index, which had seen a significant dip in 2023, rallied impressively, posting gains that surpassed many analysts’s expectations.
By mid-2024, the JSE had recovered much of its lost ground, with key sectors such as mining, financials, and technology leading the charge. This recovery not only restored market confidence but also vindicated the strategic moves made by companies that had engaged in M&A activity during the downturn.
Strategic acquisitions: Capitalising on the downturn
In times of market distress, companies with strong balance sheets and robust cash reserves often emerge as winners. They can make acquisitions that would otherwise be prohibitively expensive during market peaks. This approach, while not without risk, can lead to significant long-term benefits if executed correctly.
A prime example of this strategy in action is seen in the resource sector, where companies have taken advantage of declining commodity prices and associated stock valuations. Major players, particularly in mining and energy, have acquired smaller or struggling competitors, bolstering their market position and expanding their resource-base. These acquisitions are not merely opportunistic; they are strategic moves designed to strengthen core operations, diversify portfolios, and enhance future profitability.
The rationale behind acquiring in a bear market
The rationale for making acquisitions during a market downturn is rooted in the fundamental principle of buying low and selling high. However, this strategy is not without its complexities. Acquiring companies during a downturn requires careful due diligence, a clear understanding of the target’s value proposition, and a long-term perspective on market recovery.
For many of these South African companies, the decision to acquire during this period was based on several factors:
1. Valuation discounts: Depressed market conditions often lead to lower valuations, making acquisitions more financially viable. Companies with sufficient capital can take advantage of these discounts to acquire assets that are likely to appreciate in value as the market recovers.
2. Strengthening core operations: Acquiring complementary businesses during a downturn allows companies to strengthen their core operations. For example, a company in the retail sector might acquire a logistics firm to enhance its supply chain capabilities, thereby improving operational efficiency and reducing costs.
3. Market share consolidation: Downturns often lead to industry consolidation as weaker players exit the market or are acquired. This consolidation can increase the market share of the acquiring company, giving it a stronger competitive position when the market recovers.
4. Long-term growth potential: Acquiring companies with strong growth potential, even if they are currently undervalued due to market conditions, can set the stage for long-term success. This is particularly relevant in sectors like technology, where innovation and intellectual property are key drivers of future growth.
Looking ahead: The impact on the South African economy
As we look ahead, the strategic acquisitions made during the JSE’s downturn and the subsequent recovery in 2024 could have a significant impact on the South African economy. Companies that have successfully navigated this period by acquiring valuable assets at discounted prices are likely to emerge stronger and more competitive. This, in turn, could lead to increased investment, job creation, and overall economic growth.
Moreover, these acquisitions signal a level of confidence in the long-term prospects of the South African market. Despite the challenges of 2023, the robust recovery of the JSE in 2024 has validated the strategic foresight of those companies that took calculated risks during the downturn. As the economy continues to stabilise, these companies are well-positioned to capitalise on new opportunities, driving innovation and growth in the years to come.
Will the JSE recovery in 2024 trigger a new wave of bullish investments based on more cash being available to the JSE-listed companies and a more positive outlook for the South African economy? Time will tell, but my money is definitely on a material increase in acquisition activity.
Andrew Bahlmann is the CEO of corporate and advisory, Deal Leaders International.