Lessons In M&A For Emerging Markets

In June 2023, my company Asaak did something unusual for an African tech start-up: we acquired another company on another continent. More specifically, we acquired the operations of FlexClub Mexico, a company that offers car financing for ride-hailing drivers. The acquisition, which came off the back of our turn to profitability, was massive for us. Just a few years earlier, we’d been weeks away from having to shut down before bridging finance and a pivot to a more focused business model set us on the path to success.

Set up by a mutual investor, it has proven beneficial to both companies. It has allowed us to enter a new asset class and into FlexClub to focus on its South African operations. But it has also solidified for me why we need more mergers and acquisitions between emerging market companies, especially in an era of reduced funding.

M&A Activity On The Rise At A Time Of Low Funding

With interest rates rising steadily since early 2022, start-up investments around the globe have fallen dramatically. Venture capital (VC) investments in African startups in the first half of 2023 were down 43 per cent compared to the first half of 2022.

In part, that’s because the investors who back VCs have shifted a greater proportion of their funds to less risky vehicles, such as bonds. But it’s also because some investors relied on cheap debt to make their investments. With borrowing more expensive, it’s become more difficult to access the money they need to make investments.

That’s had significant consequences for start-ups around the world, but particularly in emerging market countries where funding has always been low anyway. In their growth phase especially, many start-ups rely on funding and investment to fuel growth until they reach the point where they’re profitable.

For those start-ups, an acquisition may offer a lifeline to employees who would otherwise be out of work. It also means that, with the right acquisition partner, the ideas and vision behind the business stand a chance of living on. Small wonder then that there were significant increases in African M&A activity through 2022 and early 2023. But mergers and acquisitions, particularly between companies founded in emerging markets, have other significant benefits too.

Geographic Expansion Made Simpler

One of the big benefits we’ve seen is that an acquisition simplifies moving into a new territory. Had we tried to enter Mexico by raising equity capital to establish our lending operations there from scratch, it would have cost us a lot of time and potentially millions of dollars.

That’s to say nothing of the fact that hiring a team in a different country comes with its own set of challenges. It requires co-founders to relocate to that country for months or years to fully understand local market dynamics and hire the right people. For us, acquiring an existing team that had already been working together for four years and nearly achieved profitability was a huge value proposition as we were able to instantly launch our business on a new continent and hit the ground running.

An additional benefit is that unless you’re acquiring an extremely distressed company, you’re also going to get a nice revenue boost. In our case, revenues increased 33 per cent overnight. There are very few things one can do to achieve such rapid growth in a short amount of time and acquisitions are one of them. As a global asset manager, we are also now able to diversify currency and interest rate risk across two highly uncorrelated markets.

Emerging Markets Understanding

Another significant benefit of acquiring a company in another emerging market is that the challenges and opportunities are familiar. Like Uganda, Mexico remains a cash-dominant economy. World Bank figures show that just 37 per cent of adults in Mexico have a formal bank account and as few as 32 per cent have made a digital payment.

While the two markets are undoubtedly unique, there are at least enough similarities that we can apply lessons that worked in Uganda. I believe that those similarities also allow us to be more understanding acquirers. That, in turn, means we won’t look to offload or close the asset at the first sign of trouble, as might happen with a developed market acquisition.

That’s not to say that acquisitions of emerging market companies by their developed market counterparts and vice versa can’t work. Having an understanding of emerging market challenges including corruption, weak institutions, and a lack of credit infrastructure makes the likelihood of success that much higher.

These kinds of acquisitions could also become increasingly important, particularly when it comes to ensuring the survival of good businesses in these markets. It’ll be some time before interest rates return to the levels we saw in 2020 and 2021, meaning that alternatives will be critical.

Not A Cure-All But Still Important

Of course, not every single merger and acquisition involving emerging market companies will work out smoothly. Even with thorough due diligence, things might not work out. Nonetheless, I believe the potential gains from emerging market mergers and acquisitions are too big to ignore.

Before any company makes such an acquisition, however, it’s important to remember that it takes time to fully understand the opportunities and risks of acquiring a company, and even before you have all the information you want you have to pull the trigger.

This article was written by Kaivan Sattar, CEO and Founder, Asaak