Stock market performance and cross-border mergers and acquisitions in South Africa

Purpose: Since the attainment of fully fledged democracy in 1994, South Africa witnessed a substantial increase in both the number and the value of completed mergers and acquisitions (M&As) targeting South African firms. In spite of this development, studies on foreign direct investment (FDI) on South Africa have not looked at determinants of entry-mode choice of FDI such as M&A. The purpose of this paper is to fill the gap in the literature by investigating locational factors that make South Africa an attractive destination for M&A activity in Africa. Design/methodology/approach: The authors analyse both the number and the value of M&As, the dependent variable. They analyse the number of firms acquired each quarter in South Africa from 1991 to 2014 using a count model – the negative binomial model. They then compare the results for this model with those of benchmark models such as the normal count and the Poisson count models. In this paper, the authors test for stationarity of the time series using the Augmented Dickey–Fuller (ADF) and the Kwiatkowski–Phillips–Schmidt–Shin (KPSS) tests. They examine the long-run relationship between the value of M&As and the selected macroeconomic variables using Johansen’s co-integration technique. Findings: This paper finds that both the number and the value of M&As in South Africa are positively influenced by the performance of the Johannesburg Securities Exchange during the period 1991 to 2014. This result confirmed the expectations hypothesis that stock markets facilitate M&A activity. The authors also observed that other financial and macroeconomic variables – exchange rate volatility, relative inflation rate and economic growth – are important locational factors for M&A activity. Among these factors, the exchange rate volatility exerts the greatest influence on M&As. The rate of growth of gross domestic product (GDP) matters for M&A activity in emerging market economies such as South Africa. Research limitations/implications: The data for the number of M&As are more complete than that of values. This is because some firms choose not to report the value of deals after a transaction takes place, resulting in missing data for the value of M&A deals. Practical implications: This paper shows the important role played by pull factors on the direction of capital flows in the long run. It is recommended that policy-makers should further strengthen and improve the efficiency of domestic financial markets. Stable and reliable monetary policy framework that maintains low levels of inflation and mitigates the volatility of exchange rate is important for FDI and M&A flows to emerging market economies. There is a need to put the necessary measures in place to improve South Africa's economic growth rate, which has been weak since the global financial crisis of 2008. Originality/value: Most academic literature has examined determinants of aggregate FDI without consideration of entry-mode choice. This paper focused on the M&A entry-mode for an emerging market economy. The authors show that equity markets play a key role in facilitating M&A activity. The expectations hypothesis by Nelson (1959) that stock markets facilitate M&A activity is confirmed in this way for South Africa.