After almost three years of lull during the downturn, mergers and acquisitions (M&As), mainly in the mid-market segment, appear to be making a healthy comeback in the Middle East.
A rise in business confidence, making Middle East one of the growth markets, is driving this latest trend of M&As.
The total value of M&A deals — 42 in total and all regional deals — done by the law firm Clyde and Co., reached $6.9 billion in 2012. Most of the transactions were in the mid market, that is, in the $20 million to $100 million range. About 20 per cent of all the transactions were over $100 million.
“We are only guessing and it’s a fairly good guess — that 2012 levels were better than 2011,” said Phil O’Riordan, partner at Clyde and Co,, which released the report on the deals for the first time. “We feel there are signs of some greater confidence. We feel that it’s been a pretty healthy number of transactions, though we still are not at the peak levels of 2007-2008.”
“We are seeing more realistic prices in the market and that is allowing deals to go through,” said Niall O’Toole, managing partner at Clyde and Co, Abu Dhabi. “We are seeing a more maturing M&A industry.”
In terms of risk allocation, that is, who is bearing the risk — the buyer or the seller — the data provided by the law firm showed the trend is towards a sellers market. And dominantly, the deals were cash transactions: 76 per cent were cash only and 21 per cent had a combination of cash and non-cash (shares) considerations.
Also, the sellers are getting in a position where they are managing to negotiate deals where there is a lower than expected percentage of purchase price adjustments, the report titled Middle East Deal Study 2013 pointed out. Only in 39 per cent of the M&A transactions there’s a purchase price adjustment. That’s a sellers doing a good job there.
Also, the trend is towards the seller wanting to cap its liability when selling. “It doesn’t want to have all these liabilities hanging around when they may have to come back and be held to account for certain things. So they are managing to negotiate quite aggressive caps on liabilities,” said O’Riordan. There was no standout sector, with a wide range of sectors from consumer goods, construction, and financial services.
“In future, deals that mix could be changed by a couple of factors and one of them being a change in regulations, which will give release to some of the pent up demand in particular sectors,” said Wayne Jones, partner at Clyde and Co’s DIFC office. Jones citedInsurance sector is one where there’s a huge pent-up demand for M&A activity.
Most of the transactions were multijurisdictional.
“So, you may have an offshore holding company that has/ that holds subsidiaries in the UAE, in Qatar, in Saudi Arabia,” said O’Riordan. “Other than saying [there’s more activity in the] UAE and Saudi Arabia most deals are pan regional because most companies now are operating across the region.”
Of the total 86 transactions, 44 were joint venture deals.
“I suppose the key message here is the JV model is still a very, very popular route to the market,” said O’Riordan. Foreign ownership restrictions, uncertainty about operating in a new business environment, licensing restrictions, bigger project sizes, which brings in bigger risks are some reasons for firms opting for JVs.
In terms of sectors, there’s a slight tendency towards financial services, consumer products and construction and projects JVs.
