New South African Review 1. Anthony Butler
MEC. These, with the exception of engineering and capital equipment, are capital- and energy-intensive process industries, such as electricity generation, minerals beneficiation (iron and steel, aluminum) and the Sasol oil from coal process and its chemicals byproducts. Downstream, value-added manufacturing sectors have not been adequately developed and manufacturing remains relatively undiversified. The structure of the economy underwent further change with the transition to democracy in South Africa and was shaped by changes in the global economy.
Many leaders of big business were uncomfortable with the democratic transition in South Africa,5 as the change in government was accompanied by massive restructuring of the South African corporate sector. I argue here that the transition to democracy is one reason for the corporate restructuring, the shape of which was influenced by important changes in the global economy. The 1990s saw the rise to prominence of institutional investors and the shareholder value movement.6 The growth to prominence of institutional investors and the shareholder value movement was part of the process of financialisation that had started in the 1970s. Crotty (2002) says that the rise of institutional investors in the US led to a situation where on average US stocks are held for just one year and, in addition, an increasing share of industrial company revenues is from financial nonproductive assets. The second change was the surge in merger and acquisition activity during the 1990s. There are a number of reasons for this global restructuring that concentrated global businesses and caused them to focus on core businesses. The prominence of institutional investors and the shareholder value movement was central to this restructuring because institutional investors demanded simpler structures. Much of the funds for the new global giants were sourced from institutional investors, who invested mostly in big companies that have familiar brands, large market share, high R&D (research and development) spending and focus on their core activities. Both these changes to the global economy had profound impacts on the structure of the South African corporate sector.
Since 1994 the South African corporate sector has engaged in the following activities:
conglomerate unbundling and restructuring;
consolidation within sectors by conglomerates as part of ensuring stronger focus and better strategic direction, which has also increased concentration;
internationalisation, mostly outward, by firms which moved their primary listing overseas, and foreign acquisitions by South African listed firms; and
black economic empowerment deals, first, through special purpose vehicles for financing and second, more recently, in areas where government policy has provided a specific impetus.
Figure 4: South African mergers and acquisitions (M&A) (Rbn, current prices)
Source: Ernst and Young M&A, 2010
Nolan (2003) points out that total global merger activity grew from over US$150 billion in 1992 to over US$2000 billion in 1998, when eight of the world’s ten largest mergers took place. By 2000 it had peaked at over $3.4 trillion. Large South African companies were caught up in this process of global restructuring, and the offshore listing of major South African corporations from 1997 can be seen within the context of this merger frenzy. The result was a spectacular growth in M&A activity in South Africa. According to Ernst & Young data there was an increase from 136 M&A deals in 1994 to a peak of 605 in 1998; from 1999 to 2002 there was an average of 530 M&As. According to Ernst & Young, in 1991 South African M&A activity was R12 billion and by 2001 M&A activity peaked to R502 billion (see figure 2).
Most of the pyramid structures, which were at the centre of the MEC as a system of accumulation and were used by the powerful families to control most of the South African economy, were restructured and disentangled. Global markets were restructured and market share was reapportioned – the wealthy and powerful in South Africa did not want to be left out of this process. They wanted to ensure not only that they got their share of the international market in minerals by internationalising their operations, but also to consolidate and secure the viability of their South African assets.
At the same time, South Africa was undergoing a transition from apartheid to democracy and there was argument about the future economic policy of the country. The changes in South Africa meant that many of the wealthy and the large corporations wanted to move their assets out of reach of the new government. The restructuring of global assets and the transition to democracy provides important reasons for the decision of a number of large corporations to move their primary listings – studies show that capital flight continued to be high throughout the 1990s, indicating that wealthy South Africans wanted to increase their wealth offshore.7 A company that moved its primary listing offshore would be able to move a large amount of capital out of South Africa legally because it would not be bound by exchange control restrictions on residents, and thus large amounts of capital could leave the country in the form of dividends or other payments.
A number of large South African corporations have moved their primary listings offshore to the London Stock Exchange since the late 1990s. This move has turned former South African corporations into foreign investors into South Africa. Some have opted for joint listings on the JSE and developed country stock markets; common reasons provided for these delistings by the ‘delisters’ are that they allowed the companies to be valued in a hard currency, reduced the risk premium for changes in the value of the rand, and improved their expansion capability. In the process they have also modified the conglomerate structure to clear up cross-holdings.
Companies that moved their primary listings include:
Billiton (formerly Gencor and now part of BHP Billiton)
SAB (now part of SAB Miller)
Anglo American Corporation
Old Mutual
Liberty
The primary listings in London were supposed to allow the conglomerates to raise capital to fund investments in South Africa, and they have managed to raise a large amount of funds in foreign markets, but they have not invested in South Africa. There has been a much more striking pattern of outward acquisition and investments. For example, Anglo American embarked on an extensive drive to increase international investments in mining while SAB, Sasol, Sappi, and Kumba have been involved in acquisitions of firms in Europe, South America, Australia and China. The offshore listings have allowed the captains of industry who live and work as businessmen in both the global North and South Africa to change their power relationship with the new South African state: they are able to control the South African assets that they wish to control but they also have more control over the movement of their capital. The South African state did not interfere in these companies because it feared losing credibility with other potential investors and financiers.
The changes also meant that the shareholder value movement in the North (including flighty institutional investors) and the business media that claim to present their views have gained more influence over the major corporations operating in South Africa and in the future direction of the economy. At the same time, the South African government has become hesitant about implementing progressive economic policies that could address unemployment and poverty for fear that these policies would drive down share prices and create a negative view of South African policies in international financial markets and business media. The result of the offshore listings was that many large South African corporations were no longer South African and that they were investing capital produced in South Africa over the past 150 years to expand their internationalised corporations. It is worth remembering that much of that capital was generated in exploiting the non-renewable mineral wealth of South Africa and harsh exploitation of South African workers. Many of the businesses that listed offshore and become global corporations had been involved in extensive merger and acquisition activity through which their South African assets