IS MERGER & ACQUISITION THE BEST GROWTH POLICY?
New Strategy: Merge, Acquire & Grow
After three years of consecutive decline, the activity in the mergers and acquisitions market picked up in 2012 and will continue to improve this year.
While stagnant capital is dead capital, the lifeline of assets and cash is movement perfectly demonstrated by mergers and acquisitions. Increased activity in the Middle East and North Africa’s M&A sector last year has helped boost business confidence. Firms in the region are gearing up for big transactions in 2013 indicating the end of deal drought caused by financial meltdown in 2008.
Even during the years when most economies were cash-strapped, liquidity was not a major issue in the region. However, low risk appetite resulted in regional investors holding back from loosening pockets.
The collapse of credit market in the United States and Arab Spring-led economic uncertainty were the two major reasons behind the metaphorical nervous breakdown of investors.
With recovery of the world’s largest economy and reasonable stability in countries such as Egypt and Libya, M&A deal brokers are back in meeting rooms brainstorming over making a perfect match of target firms and their buyers.
According to the UK-based Zephyr, which tracks M&A and IPO deals, the value of mergers and acquisitions targeting Middle Eastern companies soared 76 per cent in 2012 ending a consecutive three-year decline. Value was boosted by eight blockbuster deals each worth more than $1 billion and together representing 68 per cent of the region’s total value of $25.3bn, said Zephyr in a report published by Bureau van Dijk.
“While value improved significantly over the 12 months, it was still 53 per cent down on the $54.3bn recorded in 2008, the last year before the decline started (2009: $19bn; 2010: $17.7bn; 2011: $14.37bn).
“Similarly, the value of private equity and venture capital investment targeting Middle Eastern companies also stymied a consecutive three-year decline after a total of 13 deals worth a combined $805 million were signed off in 2012.
“However, volume failed to follow suit. There were just 13 private equity backed deals during 2012, down by almost a quarter from 17 transactions in 2011 to the lowest level in the last five years under review.
“M&A volume in the region also slipped 25 per cent over the 12 months, falling to 315 deals from 418 in 2011 and was down by two thirds on the sixyear high of 932 transactions recorded for 2010,” said Zephyr.
The market that had already hit the bottom is seeing an upswing, says Phil O’ Riordan, partner, corporate affairs, at international law firm Clyde&Co. It is still difficult to bring banks on board to finance M&A transactions, but if the lenders see a potentially good deal they compete with each other to get on the bus as there is no paucity of cash in the region, he says.
Without giving details, the Dubai-based partner of Clyde&Co says his firm is working on two deals in the region which are in excess of $600m. Spelling out the increased trend in methodology of M&As, O’Riordan says in the past 18 months the mergers and acquisitions in the region have been shifting toward auction process.
“Rather than Company A selling to Company B, we have seen more aggressive financial advisors putting in a formal auction process in M&A deals. The advisors gather data from different sources and allow statistics of different companies to compete against each other. The seller of a company or stake invites bidder in a very organized manner,” he says, adding financial advisors are trying an impetus in the market to generate momentum, which after all is not a bad thing.
While Clyde&Co’s partner is of the view that in 2013 the region will see more inward M&A deals where regional investors will be investing within the region, Bank of America Merrill Lynch’s Wadih Boueiz says the investment will be largely outbound.
“We will see more investors starting to look at the United States and some frontier markets but that does not mean investors will stop looking opportunistically at Europe and Asia. Within the frontier markets, Africa, Turkey, Brazil and Mexico will continue to see increased interest from Investors,” says managing director and co-head of corporate and investment banking at BofAML Middle East and North Africa.
“We expect some of the sovereign wealth funds, large family businesses and regional corporates to be more active in outbound M&As, whether it’s out of their countries into the GCC/Mena or globally as we have seen with Qatar going into Egypt, Turkey or Kuwait, and Saudi and Abu Dhabi investing internationally,” says Boueiz.
Within the region, Boueiz of BofAML expects to see continued consolidation among large corporates across Middle East and North Africa as governments continue to push for reforms in key sectors, one example being merger of Aldar and Sorouh.
“In addition, large government-related entities and corporates will benefit from their solid liquidity position to tap regional markets at compelling valuation levels, and with Arab Spring event, governments are also pushing ahead with reforms by promoting privatizations in important sectors and inward investments,” he says. In terms of industry, financial firms, telecoms, healthcare, insurance and education sectors are likely to be the major beneficiaries of the optimism in the M&A market.
The focus of government-related enti-ties, regional and international investors will be financial institutions, healthcare, education and telcos, while energy, power and infrastructure will also see increased activity, says Boueiz.
Clyde&Co’s Phil O’Riordan says everybody is talking about the activity in healthcare and education but the insurance sector is likely to see more consolidation in the coming years. “There are too many insurance companies in the region and most of them are thinly capitalized. There are a lot of foreign insurance firms looking to come in and as the sector is a highly regulated, the relaxation on foreign ownership model will bring in more investment in countries such as Saudi Arabia.
Western European and American companies are looking for growth markets due to lukewarm economic situation back home, and the Middle East has emerged a growth market,” he says.
Looking back at 2012, there were eight blockbuster deals involving Middle Eastern targets in 2012, all of which were valued at more than $1bn and were worth a combined $17.26bn.
By Atique Naqvi | Dubai, UAE | Uploaded on the blog recently**
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| Qatar has acquired assets in Europe. |
While stagnant capital is dead capital, the lifeline of assets and cash is movement perfectly demonstrated by mergers and acquisitions. Increased activity in the Middle East and North Africa’s M&A sector last year has helped boost business confidence. Firms in the region are gearing up for big transactions in 2013 indicating the end of deal drought caused by financial meltdown in 2008.
Even during the years when most economies were cash-strapped, liquidity was not a major issue in the region. However, low risk appetite resulted in regional investors holding back from loosening pockets.
The collapse of credit market in the United States and Arab Spring-led economic uncertainty were the two major reasons behind the metaphorical nervous breakdown of investors.
With recovery of the world’s largest economy and reasonable stability in countries such as Egypt and Libya, M&A deal brokers are back in meeting rooms brainstorming over making a perfect match of target firms and their buyers.
According to the UK-based Zephyr, which tracks M&A and IPO deals, the value of mergers and acquisitions targeting Middle Eastern companies soared 76 per cent in 2012 ending a consecutive three-year decline. Value was boosted by eight blockbuster deals each worth more than $1 billion and together representing 68 per cent of the region’s total value of $25.3bn, said Zephyr in a report published by Bureau van Dijk.
“While value improved significantly over the 12 months, it was still 53 per cent down on the $54.3bn recorded in 2008, the last year before the decline started (2009: $19bn; 2010: $17.7bn; 2011: $14.37bn).
“Similarly, the value of private equity and venture capital investment targeting Middle Eastern companies also stymied a consecutive three-year decline after a total of 13 deals worth a combined $805 million were signed off in 2012.
“However, volume failed to follow suit. There were just 13 private equity backed deals during 2012, down by almost a quarter from 17 transactions in 2011 to the lowest level in the last five years under review.
“M&A volume in the region also slipped 25 per cent over the 12 months, falling to 315 deals from 418 in 2011 and was down by two thirds on the sixyear high of 932 transactions recorded for 2010,” said Zephyr.
The market that had already hit the bottom is seeing an upswing, says Phil O’ Riordan, partner, corporate affairs, at international law firm Clyde&Co. It is still difficult to bring banks on board to finance M&A transactions, but if the lenders see a potentially good deal they compete with each other to get on the bus as there is no paucity of cash in the region, he says.
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| Arab boardrooms are buzzing with M&A talks. |
“Rather than Company A selling to Company B, we have seen more aggressive financial advisors putting in a formal auction process in M&A deals. The advisors gather data from different sources and allow statistics of different companies to compete against each other. The seller of a company or stake invites bidder in a very organized manner,” he says, adding financial advisors are trying an impetus in the market to generate momentum, which after all is not a bad thing.
While Clyde&Co’s partner is of the view that in 2013 the region will see more inward M&A deals where regional investors will be investing within the region, Bank of America Merrill Lynch’s Wadih Boueiz says the investment will be largely outbound.
“We will see more investors starting to look at the United States and some frontier markets but that does not mean investors will stop looking opportunistically at Europe and Asia. Within the frontier markets, Africa, Turkey, Brazil and Mexico will continue to see increased interest from Investors,” says managing director and co-head of corporate and investment banking at BofAML Middle East and North Africa.
“We expect some of the sovereign wealth funds, large family businesses and regional corporates to be more active in outbound M&As, whether it’s out of their countries into the GCC/Mena or globally as we have seen with Qatar going into Egypt, Turkey or Kuwait, and Saudi and Abu Dhabi investing internationally,” says Boueiz.
 |
| Arab family businesses are acquiring assets abroad |
“In addition, large government-related entities and corporates will benefit from their solid liquidity position to tap regional markets at compelling valuation levels, and with Arab Spring event, governments are also pushing ahead with reforms by promoting privatizations in important sectors and inward investments,” he says. In terms of industry, financial firms, telecoms, healthcare, insurance and education sectors are likely to be the major beneficiaries of the optimism in the M&A market.
The focus of government-related enti-ties, regional and international investors will be financial institutions, healthcare, education and telcos, while energy, power and infrastructure will also see increased activity, says Boueiz.
Clyde&Co’s Phil O’Riordan says everybody is talking about the activity in healthcare and education but the insurance sector is likely to see more consolidation in the coming years. “There are too many insurance companies in the region and most of them are thinly capitalized. There are a lot of foreign insurance firms looking to come in and as the sector is a highly regulated, the relaxation on foreign ownership model will bring in more investment in countries such as Saudi Arabia.
Western European and American companies are looking for growth markets due to lukewarm economic situation back home, and the Middle East has emerged a growth market,” he says.
Looking back at 2012, there were eight blockbuster deals involving Middle Eastern targets in 2012, all of which were valued at more than $1bn and were worth a combined $17.26bn.
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