Mergers And Acquisitions In The African Tech Industry: A Better Exit Pathway For Investors?

The state of M&As in 2022

Mergers and Acquisitions (M&As) are gradually becoming a prominent feature of the African tech ecosystem. The Dealmakers Africa report highlights a significant increase in M&As activity across the African continent in 2022, with 687 local deals announced and valued at US$17.53B. Unsurprisingly, East, West, and North Africa account for 97% of these deals announced, and 83% of all M&A activity for the period; where West Africa dominated, recording $3.29B by value, with Nigeria at the center of activity with 135 deals. The region is then followed by East Africa, which recorded deals valued at $2.88B, with Kenya leading the region with 123 deals. The MENA region saw 137 deals involving government-related entities (GRE) in 2022, which was 78% higher than in 2021 and the highest number since 2017.

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M&As in 2023

Let's take a deep dive at what happened in Q1. 2023. According to BD Funding Tracker, there were 7 acquisitions that took place in the African tech ecosystem, worth about ~$710M.

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The MENA and West Africa regions have been the front-runners this year accounting for most of the deals in Q1 2023. As this trend continues, it is important to examine the economic outlook and drivers of M&As activities.

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What Can We Expect From Startups

One of the key drivers of M&As activity in the African tech ecosystem has been the fragmented nature of the market. With many small and medium-sized companies operating in different regions and sectors, consolidation through M&As can create larger, more diversified entities that are better positioned to compete with global players and attract investment. The availability of capital has also played a significant role, which has enabled startups to make bold and strategic moves within the ecosystem.

According to the Bic Africa report, 2023 is predicted to see a wave of M&As activity on the continent, with African unicorns leading the charge by acquiring earlier-stage companies on their path to going public. African startups are still perceived as illiquid assets compared to other markets due to limited exit opportunities.

Thus the prediction that African unicorns would go on an acquisition spree in 2023 is based on the belief that consolidation through M&As would be a critical step for these companies on their path to going public. Andela's recent move in this direction seems to validate the prediction. However, the question remains whether other unicorns will follow suit. Flutterwave, Wave, and Interswitch are all unicorns with significant funding and potential for growth. It remains to be seen if they will choose to pursue a similar strategy of consolidation through M&As or not.

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What Can Investors Expect?

As the search for a proven path to liquidity in the African tech ecosystem intensifies, M&As might be an option worth considering for venture capitalists and investors. This pathway's sustainability essentially lies in the need for a proven path to liquidity for African startups, given the existence of limited exit pathways in the African tech ecosystem. M&As can provide a more attractive option for investors to cash out their investments when the companies they have invested in are acquired by other companies, as it can be faster and less expensive than traditional exit pathways such as IPOs and secondaries.

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Looking ahead, there are also potential challenges that might slow down the sustainability of the M&As trend. These include the issues of discrepancies in valuation, regulatory barriers and ecosystem nuances. As the African tech ecosystem continues to grow and mature, it is likely that we will see an increase in M&As as a pathway for investors and a means for African unicorns to consolidate and expand their offerings.

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