Global M&A activity a tale of two worlds

In the US and Canada, the skills shortage drove M&A activity in 2022 and networks are seeing this trend reflected in all its developed markets. To be competitive, many firms have had to embrace a larger commitment to remote working environments, while others have supplemented existing resources with outsourcing arrangements or offshoring of certain processes. M&A is allowing firms to combine resources and capabilities immediately. 

Technology is having a huge impact - to remain competitive, firms are having to invest significant amounts of time, money and resources in the development and implementation of technology. Firms are also looking for the ability to provide more value to their clients through additional services and capabilities and use M&A as a vehicle to gain expertise quickly.

But one of the more surprising factors driving M&A is succession. “A number of partners in accounting firms are nearing retirement age and are looking for a mechanism to monetise the value they have created in each of their firms,” says Rich Howard, chairman of the board at Kreston Global and director at CBIZ MHM. “Many firms have not adequately prepared for the transition of their business to the next generation of partners. M&A provides a long-term solution to the sustainability of the business.”

While Private Equity Investment has created a bit of a buzz, Howard says it is not the dominant form of investment in the US and that it will continue to evolve over time. “A number of issues can also arise when third party capital is introduced,” he says. “Regulatory scrutiny may be applied to the various relationships that exist between the firms and the Private Equity groups to ensure that the obligations imposed by those relationships do not run afoul of the rules and regulations applicable to accounting firms and services provided.”

“In Canada, there is a growing trend of private equity firms investing in mid to large-sized accounting firms,” says Brian Kreisman, managing partner at Crowe BGK. “Private Eeuity firms have started to set their sights on the Canadian market, but we have yet to see any impact on the current M&A activities as it mostly seems exploratory at this point." 

Jeremy Jarrell, senior manager of professional and technical services for BKR, sees M&A activity in the US slowing down and finds firms that are considering transactions are doing so based on target acquisitions for enhanced services. One concern that had been raised last year was that a churn of M&A activity would have forced US firms into a race to the top, looking to acquire or be acquired in an effort to keep growing, but Jarrell does not think this has been happening. “Among our independent member firms, we see leaders focusing on succession plans by developing their leaders from within and building a strategy around efficient technology and solid niche growth, rather than acquiring firms for the sake of larger billings,” he says.  “It is a much smarter approach as it supports the firm culture for retention and recruitment.”

Nor is upward merging becoming a trend amongst SMEs. “SMEs have more options now to use technology, staffing agencies and the resources available through their state societies or a professional association,” says Jarrell. “It is more likely that SMEs consider an upward merger because they lack a succession plan.”

Private equity firms have been stirring up the M&A market in the UK. Private equity backed firms such as Azets, Gravita, Xeinadin and Cooper Parry continue to grow their businesses and there seems to be a continuing appetite for this. The interest shown in the accountancy sector by private equity has also led to independent firms considering their own positions in a consolidating marketplace. However, a recent IAB report on the UK market predicted this activity could slow in 2023, as recent changes in base rates will increase the borrowing costs that finance these deals.

Spain has seen a lot of M&A activity amongst its SMEs, as a more heavily regulated environment and increasing reliance on technology has left Spanish firms hungry for others to acquire or merge with. In common with the rest of the world, Spanish accountancy firms are facing a skills shortage and lack of new entrants into the profession. This has led to many scrambling for resources in a market that has been boosted by the post-pandemic recovery of the economy, debt refinancing, the peak of private equity activity and new generation fund applications that have increased demand for professional practices. The market for small and medium-sized practices in Spain has churned with M&A activity and non-organic growth as they fight to keep up with market changes.

All this activity in the Americas and the US is something that African firms can only envy, where lack of liquidity is crippling local businesses. “The average savings level to GDP in sub-saharan africa as at 2012 is 25% of Africa’s GDP of USD3 trillion,” says Cephas Osoro, Managing Partner of Crowe COR LLP in Kenya. “Foreign Direct Investments (FDIs) are vital in funding M&A activities in Africa. In my opinion, there is adequate liquidity available globally, and we need to ask ourselves hard questions on why these funds are not forthcoming in the volume that is required.”

Alexandre Kouame, accountant, and statutory auditor at Exco ECA, a Kreston Global member firm, believes the problem lies with the banks. “The banks that operate in this market are often European banks,” he says. “They often support European companies established in Africa, rather than African businesses.” 

This could be vital in stabilising the continent economically - FDI investment in M&A in Africa is not just a question of promoting growth but survival, according to George Itotia, partner at Kreston KM. “A combination of high taxes and low lending has contributed to liquidity problems where many companies are folding,” he says. “In Kenya, there has been a shift by local lenders to lend to the government through investing in long-term government securities. This has affected liquidity, especially in the private sector where the sector is seen as too risky. Foreign Direct Investment is therefore a shot in the arm for local M&A to thrive.”

However, many African firms are finding that partnering is the cheaper and easier option. One of the major challenges of M&As in Africa is the financial, tax, and legal issues.  Due diligence is always encouraged to mitigate these risks, but it is an expensive affair. The best alternative therefore to M&A is partnering. Partnering will reduce the costs involved in M&A as companies look to be efficient with their budgets.

“Local companies are not able to efficiently compete with their overseas counterparts, so strategic partnering helps local companies collaborate on technology as well as to enhance the skills of local personnel,” says Itotia. “We have seen global tech and financial companies invest heavily in Kenya, threatening to drive local companies out of business due to the poaching of local skilled staff. This has in turn increased the wage bill as the demand for skilled workers increases.”

The pressure on wage costs has given rise to more virtual working, which in turn has led to more partnering between African and foreign firms. Developed markets are looking at emerging markets for talent, and emerging markets are looking toward developed markets for access to new markets, services and the like.  “These partnerships cannot be seen as a replacement of M&A between firms, since M&A brings a different level of integration. Access to markets are growth of human capital,” warned Bashier Adam, CEO, Nexia SAB&T.

Private equity is also becoming more developed in Africa, with the creation of many investment funds. “I think private equity is preferred over merger M&A,” says Kouame. “But in general, the margins that make these companies attractive to PE companies are shrinking due to the increasing competition in Africa with the establishment of foreign companies and tax pressure.”

Inflation has created a hostile political scene for investment in South America and the Middle East. Annual inflation in Chile during 2022 closed at 12.8%, the highest since 1991.  Government statistics have shown that M&As are down across all sectors in the face of an economic climate that is only getting worse.

“While the merger and acquisition processes have decreased, this does not mean that it is a dying market,” says Miguel Pavez, Managing Partner at PrimeGlobal member firm Keystone Auditores Chile. “The Chilean transactional market has recorded in 2022 a total of 324 mergers and acquisitions including announced and closed ones, for a total of USD 14.723 billion. Regarding the Cross-Border market, in 2022 Chilean companies have opted for investment in Mexico and Colombia, with 17 and 15 transactions respectively. On the other hand, the United States is the country that has opted for making acquisitions in Chile, with 47 transactions.“

According to Pavez, the greatest merger and acquisition opportunities are forecasted for 2023, in financial services, where they there will probably be in client-focused transactions; supply chain; operations; cloud; financial transformation; social and Governance. But he says it is likely that the M&A market will continue to be hard.

In Argentina, foreign direct investment has dropped significantly. According to Noemi Cohn of Abelovich, Polano & Asociados S.R.L., a Nexia member firm, analysts agree that Argentinean asset values have been depreciated, but local firms are discussing M&As as a way to move forward. Cohn is hoping the presidential elections, due to take place in October 2023, will see some recovery in the economy.

Turkey has also been struggling with inflation, or more accurately, hyperinflation. Coupled with the devaluation of the lira and the war in Ukraine, the country was driven into crisis in 2022. Confidence is key for foreign investment and Turkey's dependence on Russian and Ukrainian tourism and Ukrainian wheat knocked that confidence. Numerous changes of management at the central bank (Turkey has had four central bank chiefs in the last three years) mean Turkey has a hard case to argue for FDI cash. 

Saudi Arabia also struggled to attract FDI, so much so it set up its own investment vehicles. While FDI might be down, the Kingdom’s investment in the SME market means the nation’s venture capital funding surged by 72 % in 2022, with investments amounting USD987 million, according to MAGNiTT, a venture capital data company. However, the company has predicted that venture funding is going to start to decline in 2023 and Saudi firms are going to look to M&A to raise cash.  It predicts that well-funded companies that are supported through government initiative funds are likely to become acquirers of start-ups, rather than being acquired. 

It is clear that at least one half of the global accountancy industry is being locked out of using M&A as a strategy, either because of local political climates, or industry specific issues, such as banking strategy. As contributors have pointed out, questions need to be asked on the global stage as to why funding opportunities are available in one continent but not another, to the detriment of not just one sector, but a country. Without liquidity, government regulation and third level education recruitment schemes will not be enough to grow local sectors. An industry dominated by only a few players benefits no one.