Businesses in South Africa’s ICT sector are seeing rapid technological advancements, creating a dynamic environment for mergers and acquisitions.

Indeed, there is growing interest from international buyers in South African tech and software companies, with an influx of interest from Canadian, US, European and Dubai-based investors.

These buyers are particularly drawn to South Africa’s high-quality intellectual property, which is available at a fraction of the cost of IP in developed markets, giving them the opportunity to gain access to both regional markets and established customer bases.

Global buyers are not only acquiring technology but are also seeking to expand their geographic footprint, leverage innovative solutions and enhance their market presence in the region. This trend points to an evolving M&A market where strategic acquisitions aim to unlock broader growth opportunities beyond just technological assets.

South Africa is home to a wealth of exceptional IT and software-related expertise, as seen from the number of recent high-profile acquisitions, both local and international. While the South African M&A market is still relatively small compared to the US, 2024 saw transactions ranging from US$10-million to $30-million, with some deals reaching as high as $100-million.

Key deals

Key acquisitions included:

Lesaka Technologies buying Adumo
Xero (New Zealand) acquiring Syft
Advent International (US) acquiring Syspro
Syntax (Canada) buying Argon Supply Chain Solutions
Convergence Partners snapping up Datacentrix

Interestingly, the availability of capital is rife in the current global M&A market and, contrary to seller logic, buyers won’t shy away from higher deal values to acquire companies with the right business models and strong potential for growth. Deploying capital has never been the problem.

For instance, a key characteristic of the current M&A landscape is the significant variation in company valuations. It is not unusual for businesses to receive offers that differ by as much as 50%, and in some cases this can exceed 200%. This considerable variation reflects the complex and multifaceted nature of M&A activity, where each potential buyer brings their own set of strategic priorities, market insights and financial goals.

The difference in bids can be influenced by numerous factors, including the buyer’s long-term vision, risk appetite and understanding of the target company’s market potential. Some buyers may prioritise immediate returns, while others may place more value on IP, regional access or the scalability of solutions. These differing perspectives lead to a wide range of offers, underscoring the unpredictable nature of the M&A market.

The wide gaps in valuations therefore highlight the critical need for expert insights and thorough due diligence throughout the acquisition process. Navigating this evolving market demands a nuanced understanding of both business valuation and strategic alignment to ensure successful outcomes for all parties involved.

Understanding the motivations behind different types of buyers is critical for sellers. There is no one-size-fits-all approach to M&A transactions. While some buyers prioritise expanding their customer base, others are more focused on acquiring specialised IP or establishing a regional presence. For example, one US buyer recently sought South African companies in cloud services, data security and disaster recovery to build its client base and enhance its market positioning. This diversification in buyer interests points to a need for business owners to clearly understand how their service/product offerings align with the needs of potential buyers before going to market and framing their narrative to their specific strengths.

There are a few key strategies for businesses preparing for an M&A transaction:

Demonstrate how your company complements potential acquirers’ existing operations, whether through broader IT services or specialised software solutions.
Tailor your pitch to the specific goals of buyers, whether they are looking for market expansion, valuable IP or new customer segments.
Always focus on highlighting customer quality, annual recurring revenue (ARR) and low customer churn.
Focus on growth, demonstrating scalability and strong growth potential for attracting the right buyers and achieving higher valuations.

Furthermore, there is a common theme arising from buyers’ preferences to acquire companies with strong, contractually locked-in ARR business models, creating a direct link between ARR and deal valuations.

One of the key advantages in today’s South African market is the ability to produce the same product or output at a significantly lower cost. This presents a major opportunity for international acquirers. When combined with a strong customer base and ARR streams, this creates an attractive proposition. International buyers can easily integrate quality assets into their global networks, leveraging their established reach to drive growth and expansion.

However, tech and software businesses often challenge traditional valuation models, particularly those based on Ebitda (earnings before interest, tax, depreciation and amortisation) or revenue multiples. For instance, rapidly growing businesses, even if not immediately profitable, can still command significant valuations due to their strong ARR and scalability. For software businesses with high margins, the focus may shift from revenue multiples to Ebitda multiples, emphasising profitability and future growth potential – especially for international buyers looking to scale the business post-acquisition.

Creating ‘deal heat’ to maximise value

To maximise value in M&A transactions, it’s crucial to generate “deal heat” – creating competition among buyers to drive up offers. International buyers, in particular, are often willing to pay a premium for future growth, especially when they see the potential to scale products into new global markets. North American buyers, skilled at leveraging global networks and driving sales, are particularly drawn to businesses with strong scalability.

As the M&A market in IT, tech and software continues to grow, companies that are well-prepared can seize the opportunities. By understanding buyer motivations, positioning their business effectively and demonstrating strong growth potential, high-value targets can secure the best possible deals in an increasingly competitive landscape.