Middle East ranked in first of its kind M&A maturity index

Press release
Published December 26th, 2010 - 04:01 GMT
Co-author of the Maturity Index study and Director of MARC, Professor Scott Moeller
Co-author of the Maturity Index study and Director of MARC, Professor Scott Moeller

A new study from the Mergers and Acquisitions Research Centre (MARC) at Cass Business School, which is part of City University London, provides the most accurate available picture of the global M&A market, illustrating a country's ability to attract and sustain M&A activity, as well as identifying areas where improvement is needed for development.

The Gulf States including the UAE, Saudi Arabia, Qatar, Bahrain, Oman and Kuwait, as well as Jordan, score as 'transitional' markets in the new study, while Egypt is identified as an 'emerging' market for M&A activity.

The Cass MARC M&A Maturity Index, sponsored by Ernst & Young, Allen & Overy, Credit Suisse and Mergermarket, is the first of its kind and ranks the maturity of 175 countries for M&A activity according to their regulatory, economic, financial, political, technological and socio-cultural environments. The index has a 0.81[1] correlation with M&A activity; more than double that of the World Bank Group's 'Protecting Investor Index', which has a correlation of just 0.30.

Unsurprisingly, traditional bases for M&A activity, such as the UK, US and Japan, top the rankings. However, Asia, including South Korea, Singapore and Hong Kong, also emerges as a favourable region for M&A purposes.

As a region, the Middle East is classified as mid-way in the transitional development stage, on par with other transitional markets such as Latin America, and Central and Eastern Europe. On the whole, the index recognizes the Middle East is as an increasingly important net investor, however its regional score of 2.8 (index equivalent of approximately 56%) indicates that several developments are necessary in order for it to become a 'mature' region for inbound and domestic M&A.

While the region presents a relatively stable political environment with a favorable regulatory system, the research shows it lags behind in terms of technological and socio-cultural developments. According to the study a country's technological advancement is the most important driver of M&A activity in the 'transitional' development stage, explaining 40% of the differences in M&A activity between countries.

Phil Gandier, Head of Transaction Advisory Services at Ernst & Young Middle East and North Africa said: "It is clear from historical data that with greater M&A market maturity comes greater sustained deal flow, irrespective of economic cycles. Performance of regional M&A markets in 2010 indicates that the appetite for deals is growing. The region is moving up the fast growing 'transitional' category and is poised to escalate deal flows, even though more investment in technology and financial infrastructure is needed. With an average score of 2.8, the Middle East's relatively new M&A markets have undergone rapid development over the past five years as compared to the mature markets who have an M&A history of many decades."

The UAE ranks 29th on the index, with a high overall MARC score of 2.2 (almost 80%) which indicates that it is relatively mature for domestic and inbound cross-border M&A purposes. The index classifies the UAE as a 'transitional' market, but predicts that it will reach the 'mature' stage by the time of the index update report expected next year.

The UAE's strong position is linked to features such as its high level of political stability and low levels of corruption, with a score of 1.3 for its political environment (close to the 'mature' market average of 1.1). However, the country's score of 3.0 for its technological environment is significantly worse than the 'transitional' market average, indicating that increased investment and development is necessary in this area before the UAE can be viewed as a 'mature' market.

Saudi Arabia, Qatar, Bahrain, Oman, Kuwait, all achieve similar scores on the index, ranging from (2.6-2.9 / approximately 52% - 58%) and are also classified as 'transitional' markets with growth potential. Considered to be of high interest to foreign companies, these markets are becoming increasingly more active in the global M&A market, but further development is needed to boost technological output and to improve socio-cultural factors in order for these markets to reach 'mature' level.

Representing the wider Middle East, Jordan is placed on the cusp of the 'transitional' market category with a score of 3.0, while Egypt is classified as an 'emerging' market with an index score of 3.1. Despite Egypt's ranking placing it close to the 'transitional' market average for regulatory factors, the country's low political score, as well as weakness in technological and socio-cultural factors is holding it back from reaching the transitional development phase.

According to the study the proportion of M&A deals involving firms from 'emerging' market countries has enjoyed steady growth since the 1990s. In 1998, the proportion of 'emerging' market deals was just above 10%, a figure which had more than doubled to over 25% in 2009, making these 'emerging' markets important to watch.

Co-author of the study and Director of MARC, Professor Scott Moeller, said: "The Cass MARC M&A Maturity Index provides a robust illustration of M&A maturity on a country level and can function as a practical starting point for discussion around deal-making in lesser known markets. As we update this study annually, we will begin to see patterns emerge and it will be possible to track regional M&A maturity over time."

Perhaps one of the most unexpected findings from this study is that more M&A deals tend to occur when political instability is high, but only in 'transitional' markets. This finding suggests that political instability provides opportunities for dealmakers and investors, even though the risks are correspondingly high.

The analysis of what drives activity at various stages of M&A maturity also reveals that although advanced levels of development of the country's technological and political environment is a prerequisite for M&A maturity, this has virtually no differentiating effect on M&A activity at the mature level . Instead it is socio-cultural and regulatory factors that are the critical drivers.

The Cass MARC M&A Maturity Index gives a score from one to five (one being fully mature for M&A purposes) for each of the 175 countries rated. The country index is calculated by using an average weighting of six groups of factors which have been identified as being critical for a market to attract and sustain M&A activity. These include regulatory (e.g., rule of law and regulatory quality), economic (e.g. GDP growth and economic freedom), financial (e.g., stock market capitalisation and access to financing), political (e.g., political stability and corruption of officials), technological (e.g., R&D expenditure and innovation) and socio-cultural environments (e.g., people, talent and labour skills).

Background Information

Cass Business School

Cass Business School is one of City, University of London’s five Schools. It’s among Europe’s leading business schools and in the global elite of business schools that hold the gold standard of ‘triple-crown’ accreditation.

 

Ernst & Young

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