Afrigather 2022 started with Volaris Group’s $88 million acquisition of software and IT firm Adapt IT in January. Different acquisitions have adopted: Principa’s acquisition by Hyperclear, inq.’ acquisition of Syrex, Gumtree’s acquisition by Impresa Capital, Teraco’s acquisition by Digital Realty, TymeBank’s acquisition of Retail Capital, and extra.
In response to Disrupt Africa’s 2022 South Africa Startup Ecosystem Report, the nation’s startup ecosystem leads the way in which in exit mergers and acquisitions (M&As). Refinitiv Information says that in the first half of 2021, South African mergers and acquisitions raked in $52 billion (R760.8 billion) from a complete of 169 offers, marking a 958% enhance in worth from the identical interval in 2020. Of this, offers involving tech corporations elevated by $160 million, an virtually 2,000% enhance in comparison with the identical interval in 2020.
Since 2015, over one-third of acquisitions within the African tech area have concerned South African corporations.
“It’s primarily the form and construction of the financial system [that makes acquisitions possible]. South Africa [has] extra mature corporations which are actually rechanneling funds into the start-up tech scene. Capital markets and our banking system are additionally taking part in a supportive function,” Tshepo Magagane, an funding banker in one of many nation’s main banks, tells TechCabal.
The presence of robust and established native corporations, each tech and in any other case, means exits are by no means far-off from budding and viable startups. These startups stay enticing to many younger graduates guaranteeing the startup pipeline continues to broaden.
“What you see in South Africa is a extra pronounced native ecosystem; the likes of Naspers Foundry and huge Know-how, Media, and Telecom (TMT) corporations are massive drivers of exercise. Successes from Naspers and different telco giants akin to MTN and Vodacom have created a virtuous cycle,” Tshepo provides. “Graduates popping out of College of Cape City, College of Pretoria, Wits, Stellenbosch are usually not in search of jobs in massive corporations; they’re specializing in start-ups and small corporations.”
A quick historical past of tech acquisitions in South Africa
In December 1999, a four-year-old South African digital certification firm known as Thawte and primarily based in Cape City was acquired by US-based Verisign in a deal price $575 million on the time (~$1 billion in the present day). The corporate had been based in 1995 by Mark Shuttleworth whereas he was nonetheless a scholar on the College of Cape City, in his dad and mom’ storage. On the time of its acquisition, Thawte operated in over 100 nations throughout and had someplace between 20,000 and 30,000 clients.
Thawte was the primary ever full-security encrypted e-commerce net server commercially out there outdoors of america. It and VeriSign have been the one two digital certificates suppliers on the earth with business availability of 128-bit web site certificates.
Speaking on the time of its acquisition by VeriSign, Shuttleworth talked about that the deal was the perfect transfer with the intention to pace up Thawte’s progress and unlock its true market potential. “We thought-about numerous choices however the merger with VeriSign, which is listed on Nasdaq, emerged because the [most efficient] means to unlock our worth,” he mentioned.
Along with his newfound wealth, Shuttleworth began Right here Be Dragons (HBD) Enterprise Capital in September 2000, the primary enterprise agency in Africa, which sought to spend money on native South African companies with worldwide potential.
A decade later, Keet van Zyl, who labored for HBD as a enterprise capitalist from 2007 till 2010, launched Knife Capital with Andrea Bohmert and Eben van Heerden. The enterprise agency took over administration of seven HBD portfolio corporations together with Fundamo, a cellular monetary companies firm that was later acquired by VISA in 2011 for $110 million. One other Knife Capital firm, CSense, a Pretoria-based analytics software program firm, was acquired by US-based expertise firm Common Electrical in the identical yr. Seven years after that, orderTalk, a web-based ordering software program firm, was acquired by UberEats.
And so started South Africa’s M&As’ story, a journey with landmark offers akin to Softline’s 2003 acquisition by UK-based Sage Group for £66 million (~£104 million in the present day), Nimbula’s 2013 acquisition by Oracle for $110 million, and Tyme’s 2014 acquisition by Commonwealth Bank of Australia for $40-million.
Tech acquisitions in South Africa in the present day
Right this moment, acquisitions in South Africa can broadly be categorized into three:
- Inbound inter-country acquisitions of South African startups by worldwide corporations (largely US-based),
- Home intra-country acquisitions of South African startups by well-established South African corporations, and
- Home intra-country acquisitions of South African startups by different South African startups.
Inbound inter-country acquisitions by worldwide corporations embrace Visa’s $110 million acquisition of cellular monetary service supplier Fundamo in 2011, Oracle’s $110 million acquisition of cloud computing startup Nimbula in 2013, FirstData’s $54 million acquisition of cellular present card startup Gyft in 2014, 2U’s $103-million plus $20-million in cash acquisition of Cape City primarily based training platform GetSmarter in 2017.
Home intra-country acquisitions of startups by well-established corporations are the commonest offers. A few of these offers are TymeBank’s acquisition of Retail Capital, Altron’s acquisition of LawTrust and UbushaTechnologies, PicknPay’s acquisition of delivery startup Bottles App, African Vogue Worldwide’s acquisition of Wezart, and The Foschini Group’s acquisition of e-commerce and last-mile delivery service Quench.
The final class of acquisitions, albeit much less common than the opposite two, is startups buying different startups. Appreciable funding rounds for home startups usually furnish them with sufficiently big capital warfare chests to make a majority of these acquisitions. Examples embrace fintech startup Yoco acquiring Web3 software program improvement company Nona Digital after elevating an $83 million Series C round and edtech startup Snapplify buying digital publishing startup Onnie Media after raising $2 million.
Causes for acquisitions
M&As are sometimes valuable exit avenues for each companions. Acquirees get a really good payday for founders, staff, and buyers, in addition to entry to a broader pool of markets, assets, and capital. Acquirers profit from product diversification, expertise acquisition, and market enlargement.
In response to Chris Loker, managing companion of the company advisory agency Moksha, the principle motivators for tech startup acquisition offers are exits, both for worldwide progress, procuring capital required to scale, or entry to a wider shopper base. However these offers come notably when the idea is confirmed.
“…banks have even arrange incubators to check new improvements, understanding {that a} company is commonly the place innovation goes to die and their new product lead occasions will be a few years. The travesty is that we don’t usually get repeat entrepreneurs as failure is seen with disdain or exits are wealthy sufficient – within the latter case the pattern of profitable entrepreneurs turning into angel buyers will hopefully develop,” Loker defined.
For extra established corporations—and a few startups too—the principle cause is product diversification. Buying a startup that already has a product and traction, as an alternative of constructing the mentioned product from scratch, makes extra enterprise sense.
A South African funding banker who has overseen quite a few acquisitions and desires to stay nameless for employment causes defined:
“I’ll give an instance of when a variety of retailers have been caught off guard when the [COVID-19] pandemic hit. A variety of their on-line shops weren’t nicely established to really service their clients when the lockdown occurred. This then drove a variety of them to both consider whether or not they may develop or enhance their on-line mediums rapidly sufficient. The quickest route out of this predicament could be to do an acquisition and an instance is MassMart acquiring OneCart to help them with their on-line service providing.”
Various acquisitions which have occurred within the South African tech area do appear to be majorly pushed by product diversification. Weaver Fintech acquired PayJustNow to broaden into buy-now-pay-later. TymeBank acquired Retail Capital to broaden into providing on-line banking companies for SMEs. inq. acquired Syrex to diversify its product providing into hyper-converged cloud expertise. Imperial Logistics acquired ParcelNinja to broaden into e-commerce and last-mile distribution and, Vodacom acquired iot.nxt to broaden into web of issues (IoT).
Market enlargement and expertise acquisition are two different important causes for acquisitions in South Africa.
A market-expansion-driven acquisition instance is Africa Fashion International acquiring online art marketplace Wezart with the intention of utilizing the platform to broaden its product providing globally and supply a stronger person base for artists.
Expertise acquisition offers are additionally getting extra common as a result of because the ecosystem is rising, competitors for tech expertise can be getting harder within the continent. For startups who’ve the capital, it usually saves money and time to accumulate a smaller startup to combine its expertise as an alternative of poaching its expertise. This is called an acqui-hire.
For instance, after raising an $83 million Series C spherical in July 2021, fintech startup Yoco acquired web3 software program improvement company Nona Digital in March 2022 to speed up its roadmap by bringing a crew of highly-specialized fintech product and expertise professionals into the Yoco crew.
The function of enterprise capital in enabling acquisitions
The inflow of enterprise capital into the nation’s ecosystem over the previous couple of years is one other issue driving acquisition exercise as startups are capable of construct higher merchandise, making them enticing to potential suitors.
According to Disrupt Africa, between January 2015 and Could 2022, a complete of 357 particular person South African tech startups raised a mixed US$993,684,600, a determine topped solely by Nigeria over that point. Funding, each when it comes to the amount of startups backed and the overall worth of the funding offers has typically elevated year-on-year within the final three years. 2022 is already on the right track to be a file yr for the nation in each metrics.
South African startups additionally collected more than 21% of all VC funding deals in Africa between 2014 and 2019. That is in distinction to Nigeria’s 14%, although Nigeria is the continent’s largest economy by nominal GDP and has greater than 3 occasions South Africa’s inhabitants.
Other than the nation’s robust macroeconomics, legislations such because the not too long ago phased out Section 12J tax incentive have additionally contributed considerably to attracting enterprise capital. Launched in 2008, the tax incentive was meant to encourage South African taxpayers on the highest marginal tax price of 45% to spend money on enterprise capital corporations that fund small- and medium-sized enterprises with long-term progress potential. Your entire quantity that’s invested might be deducted from the investor’s taxable revenue after being held for the legally required five-year interval.
To make the most of the inducement, a number of main South African VC companies together with Knife Capital, Kalon Enterprise Companions, Sanari Capital, E4E, in addition to Kingson and Anuva Investments have created Part 12J funds particularly concentrating on startups.
Examples of beneficiaries of Part 12J funds embrace Snapplify, an edtech firm, specializing in digital training content material, which went on to accumulate Onnie Media, a digital publishing startup in 2020.
One other startup that has benefitted from a Part 12J fund and went on to make an acquisition is Yoco. The fintech startup secured funding from Kalon Enterprise Companions’ Part 12J devoted fund and went on to ultimately acquire Cape City-based fintech and Web3 software program improvement company Nona Digital.
Though the inducement was discontinued in 2021 by the federal government for apparently failing to realize its mandates, some key gamers within the tech ecosystem consider the inducement labored precisely as meant. Clive Butkow, CEO at Kalon Enterprise Companions defined that Part 12J funds helped overcome the hurdle of worldwide buyers being hesitant to spend money on South African tech start-ups earlier than they’ve confirmed their enterprise mannequin and confirmed robust progress. By offering native tech start-ups with seed and progress funding to quickly broaden their operations, Part 12J funds gave extra startups an opportunity to develop into extra acquisition-attractive.
Different enabling components akin to a liberal doing-business environment, mature tertiary education, as nicely an established corporate environment coupled with a multiplicity of entrepreneurs facilitate the proliferation of M&A exercise within the nation’s tech ecosystem.
Regardless of a lot success…
Regardless of the South African tech ecosystem seeing important success in M&A exits relative to the remainder of the continent, based on Loker, there may be nonetheless a lot room for enchancment.
“The regulatory setting is nice with a lot safety provided however bureaucratic crimson tape, legislative inefficiency within the type of lack of adherence and policing. Competitors authorities and empowerment necessities are additionally trending within the incorrect path,” Loker informed TechCabal.
Though South Africa climbed 2 locations on this yr’s World Competitiveness Yearbook (WCY), the nation dropped 2 places within the newest, although discontinued, World Financial institution Ease of Doing Business rating.
All these dents in South Africa’s ecosystem level to the truth that though the nation is a beacon of success when it comes to M&A exits on the continent, different African ecosystems ought to be cautious of its shortcomings after they attempt to emulate its mannequin.
