Over the past few years, there has been an increase in Mergers and Acquisitions (M&A) operations in the Middle East, probably due to the region’s improving economic stability and rising investment in infrastructure in addition to the role of supportive government policies in promoting such deals. Levels of M&A in the Middle East remain higher than the global average, and this trend is anticipated to persist.
In 2018, the international mergers and acquisitions (M&A) scene was divided into two halves. In the first half, global dealmaking activity was relatively high, but in the second half of the year, activity decreased significantly. However, the Middle East continued to be a hotspot for investment, with deals totalling $1.8T in 2018.
In the first five months of 2022, there was a lot of merger and acquisition activity going on around the world. This was a big success for the industry, as it showed that businesses were still interested in making deals. In the middle of the year, following several interest rate hikes by central banks in large economies, combined with heightened macroeconomic uncertainty, the deal market entered a cooler phase. This caused many large deals to slow down, while smaller deals stopped happening altogether.
Overall, global deal activity slowed in 2022, settling at $3.8T. This was down from $5.9T the year before, and deal volume fell by 12%. However, the Middle East managed to buck the trend, with deal activity increasing by 10%.
According to Bain & Company’s estimates, M&A activity in the region is on the rise, with activity increasing by about 39% in 2022. This is likely due in large part to government-owned sovereign wealth funds investing in various companies in the region. For example, Saudi Arabia’s state-owned Public Investment Fund invested $1.3B in four Egyptian companies in August 2022, including Abu Qir Fertilizers and Alexandria Container and Cargo Handling.
Combined, sovereign wealth funds and corporations represent 84% of all Middle East deal value. “But sovereign wealth funds are where most of the action is,” stated Grégory Garnier, a deals-focused senior partner at Bain in the report’s chapter dedicated to the Middle East.
The Global M&A Report is a valuable resource for investors, executives, and others interested in understanding the current state of the M&A market. The report provides detailed information on sector dynamics, deal activity, and key trends. The report is also a valuable tool for training and recruiting. Bain & Company is a strategic consulting firm with a history of mergers and acquisitions. The firm’s Global M&A Report has been tracking in-depth sector dynamics for over a decade, with spin-off reports created for regions, deal buyer segments (for example: private equity) and sectors (for example: healthcare).
“There is a growing trend among corporations to invest in start-ups or scale-ups as a way to bolster innovation and rapidly upskill their talent pool.”
According to the firm’s 2023 analysis, sovereign wealth funds are buying up assets with the goal of building local champions, investing in strategic industries of the future, and expanding their market share in new verticals. Some motivations for foreign investments by state-owned enterprises (SOEs) include increasing their visibility on the global stage, acquiring prestigious assets, or increasing their profits. For example, Qatar Investment Authority (QIA) bought the St. Regis hotels in New York City and Rolls-Royce, an engine maker, as examples of investments that aim to increase the SOE’s visibility and prestige.
Corporate deals happen all the time in the business world. Companies buy other companies, or form partnerships to consolidate local markets in strategic sectors. One recent example is the deal between Saudi British Bank and HSBC Saudi Arabia, and the Etihad-Air Arabia joint venture.
Many regional companies are expanding internationally through cross-border M&A or through overseas investments. For example, First Abu Dhabi Bank merged its Egyptian operations with Bank Audi Egypt, creating one of Egypt’s largest banks. This approach can be very successful as it allows companies to tap into new markets and expand their operations rapidly.
There is a growing trend among corporations to invest in start-ups or scale-ups as a way to bolster innovation and rapidly upskill their talent pool. This strategy has proven to be successful in many cases, as it has fostered rapid growth and innovation among these companies.
While the private equity scene accounts for a major chunk of global deals activity, in the Middle East, their role is “limited in the region and has actually dropped significantly in 2022.” This is likely due to the region’s ongoing economic struggles.
“M&A activity in the regional markets increased by nearly 39% in 2022, largely due to the activity of government-owned sovereign wealth funds.”
Looking ahead, Bain & Company’s experts believe that also in 2023, the Middle East will demonstrate relatively higher deal activity than other regions. “These are good times for the local economies. Buoyed by strong economies, and ambitious government-backed mandates to push to expand beyond hydrocarbons as well as globalize its companies, the Middle East is well positioned to rely on M&A to further advance the region’s long-term agenda,” said the report’s authors.
In light of recent reports suggesting that two thirds of Middle East CEOs plan to pursue M&A as part of their strategic agenda and roadmap, it’s clear that this area is of great interest to them. This suggests that businesses in this region are optimistic about their future and are willing to take risks in order to grow. Middle Eastern sovereign wealth funds are using M&A to expand into new sectors and build local champions, according to Bain & Company’s fifth annual Global Mergers & Acquisitions report. This trend is likely to continue as Middle Eastern funds seek to build their portfolios beyond traditional investment vehicles, such as equities and bonds.
By investing in innovative businesses and consolidating their market positions, these funds are positioning themselves to take advantage of future growth opportunities in their regions. This strategy is helping these funds become nimbler and more competitive, and is likely to continue as these funds seek to build long-term wealth portfolios. In particular, Middle Eastern funds are increasingly targeting smaller, early-stage companies, as these tend to be more profitable and have a higher potential for growth. The move will strengthen partnerships, invest in the future, and bolster the region.
M&A activity in the regional markets increased by nearly 39% in 2022, largely due to the activity of government-owned sovereign wealth funds. Together, these funds and corporate entities represented 84% of all deals during the year, with private equity investors making relatively few investments.
“With a strong economy buoyed by high oil prices, the Middle East is well positioned to rely on M&A to further advance the region’s long-term push to expand beyond hydrocarbons as well as globalise its companies,” the report noted.
“These are good times for the local economy, with expected regional GDP growth of 6.5% (7.6% in Saudi Arabia), the highest it’s been in more than a decade. The Middle East’s sovereign wealth funds are growing, too, and with a new government mandate, they have become a treasure chest for much of the M&A activity.”
The report cited Saudi Arabia’s Public Investment Fund (PIF) investing $1.3B in four Egyptian companies in August 2022. Among these companies was Abu Qir Fertilizers and Alexandria Container and Cargo Handling. On one hand, private equity activity in the region has decreased by 36% in the first 10 months of 2022. However, there are some signs that interest in IPOs is picking up, which may indicate a possible revival of the private equity market.
Corporations are buying companies or forming partnerships to consolidate local markets in strategic sectors, such as the deal between Saudi British Bank and HSBC Saudi Arabia or the Etihad-Air Arabia joint venture. This trend is likely to continue as corporations seek to improve their competitive edge and gain an advantage in the local market.
“In the years ahead, we expect more international companies will explore the cross-border possibilities of partnering with sovereign wealth funds and local authorities to create new sectors through joint ventures,” Bain & Company added.
Manoj Sureka
Managing Partner,
Synergy Fin. Consulting
manoj@consultsynergy.ae
