ANDREW BAHLMANN: Opportunity amid currency fluctuations as manufacturing giants target SA

For years SA’s undervalued currency has been viewed through a lens of apprehension, an indicator of economic instability and uncertainty. However, savvy investors discern a golden opportunity amid the perceived chaos.

Fuelled by the strength of their own national hard currencies, international manufacturing businesses have determined on a calculated journey of mergers & acquisition in SA, recognising the tide will turn and there is inherent value waiting to be unlocked.

According to The Economist’s Big Mac Index for 2024, which measures purchasing power parity, the implied exchange rate of the rand to the dollar is R9.12, virtually double its current value. As the saying goes, in every challenge lies an opportunity, and in SA’s weak exchange rate lies the strategic rationale for M&A transactions for forward-thinking manufacturers.

Companies with exposure to international markets can capitalise on favourable currency dynamics to acquire assets at a discounted price in rand terms. This not only enhances their competitiveness but also strengthens their position in the global marketplace. Furthermore, M&A offers opportunities for synergies, scale economies and strategic diversification, enabling companies to navigate market uncertainties and drive sustainable growth.

European companies in particular are acquiring operations in SA to be used as a base for expansion into Africa, which they expect will host the next great economic boom. In many instances local companies that were distributors of foreign-owned manufacturers have become wholly owned subsidiaries.

This strategic move reflects a shift in the dynamic of global business operations and underscores the desire of multinational corporations to gain greater control over their distribution channels in key markets, especially after the logistics logjam that has followed Covid-19. One of the primary drivers behind this trend is the pursuit of operational efficiency and streamlined supply chain management.

By bringing local distributors under their direct ownership, international manufacturers can exert more influence over distribution processes, optimise inventory management, and ensure consistency in product availability and delivery standards.

In addition, by establishing wholly owned subsidiaries in SA international manufacturers can mitigate risks associated with relying on external partners. This includes reducing the potential for conflicts of interest, safeguarding intellectual property rights and ensuring compliance with corporate governance standards.

Furthermore, direct ownership grants companies greater flexibility in implementing strategic initiatives such as expansion plans, pricing adjustments and branding campaigns, without being encumbered by the constraints of a separate distributor.

While currency-driven M&A presents compelling opportunities, it also comes with inherent challenges and risks. Fluctuating exchange rates can affect deal valuations, financing arrangements and post-merger integration efforts. Additionally, geopolitical uncertainties, regulatory complexities and macroeconomic factors may influence the success of M&A transactions. Therefore, thorough due diligence, risk assessment and strategic planning are essential to mitigate risks and maximise value creation.

Beyond traditional M&A transactions, strategic partnerships and alliances offer alternative avenues for value creation in SA’s manufacturing sector. Collaborative ventures with foreign counterparts can facilitate knowledge transfer, technology exchange and market access, driving innovation and competitiveness.

Silver lining

So there is a silver lining to a weak currency. It can create favourable conditions for inward M&A as well as foreign direct investment (FDI) in several ways. A weak currency can enhance the competitiveness of a country’s exports, making its goods and services more attractive to foreign buyers. This can stimulate demand for the country’s products and services abroad, leading to increased export revenues and potentially driving economic growth. In turn, this enhanced competitiveness can also attract foreign investment, including FDI, as investors seek to capitalise on the country's lower production costs and export potential.

For multinational corporations, a weak currency in a target country may present strategic expansion opportunities. Acquiring assets or establishing operations in a country with a weakened currency can provide access to new markets, resources and talent at a lower cost. This can allow companies to diversify their revenue streams, mitigate currency risk and strengthen their global presence.

However, while a weak currency can create favourable conditions for inward M&A and FDI, there are implications for the country selling its assets cheaply. Selling assets at a discounted price due to a weak currency may result in a loss of control of key industries or strategic assets. This can have implications for national sovereignty and economic independence, particularly if critical infrastructure or strategic sectors are sold to foreign entities.

Reliance on foreign investment to capitalise on a weak currency may create economic dependence on foreign capital and investors. This can leave the country vulnerable to external shocks or changes in investor sentiment, potentially undermining its economic stability and autonomy.

Selling assets cheaply due to a weak currency may lead to long-term value erosion and missed opportunities for domestic value creation. While immediate gains may be realised through asset sales, the country may forgo the potential benefits of retaining and developing its assets in the long term, including job creation, technology transfer and sustainable economic development.

A weak currency is often symptomatic of broader economic challenges, including inflationary pressures, fiscal deficits or macroeconomic imbalances. Continued currency devaluation can erode purchasing power, increase import costs and contribute to inflationary pressures, adversely affecting living standards and economic welfare.

• Bahlmann is CEO: corporate & advisory at Deal Leaders International.