A global boom in Mergers and Acquisitions (M&A) has given the Middle East region and the GCC market a pass-over – this is the expert view. In this article, we will see if this is the reality at the ground level and if so, then what the primary reasons behind it are.
The relationship and linkages between economic growth and finance is neither direct nor proportional. In this scenario, it is even more difficult to understand the tenuous relationship between M&A and economic growth. Extensive studies have shown that cross-border mergers and acquisitions promote economic growth in the host country whereas M&A proves beneficial only and only if the country concerned has adequate levels of human capital.
An important driver of economic growth, M&A has long been a critical element of study for economists and policy experts alike. Despite a worldwide boom in M&A, in Dubai, the regional deals didn’t go through smoothly. According to the Thompson Reuters data, the global M&A volume in 2015 was a record $4.6 trillion (Dh 16.8 trillion), transaction between parties in the Middle East was just $12.68 billion in the same year [data studied up to December 7]. That makes it the slowest year in terms of value since 2011. If we look at the same data, then it’s quite clear that the actual number of deals is probably the lowest since 2007.
In fact, one of the major reasons cited and shown as a reason is the drying up of major deals. The sale of Dunia Finance, a consumer finance firm, is a great example. Sources showed very clearly that buyers initially showed a lot of interest in the consumer finance firm but as the sellers’ price expectations became clear, the potential buyers were put off by the valuations and the unreal price expectations.
Another case in point is the stake sale of Azadea Group which too ran into rough weather owing to difficulties in value expectations mismatch. KKR and the Dubai-based Fajr Capital’s joint bid for a 25 percent ownership stake in the Azadea Group was riddled with disagreements over valuations between the buyers and the main holding family group of Azadea Group. So, another M&A potential sale got stuck and didn’t go through because of valuation differences.
These two major M&A stake sales didn’t go through and single-handedly knocked down the reputation for M&A doom in Dubai. Deals falling through or not going through at the last moment have led to experts proclaiming the verdict that M&A boom has bypassed the Dubai, Middle East region.
The only bright spot in this gloomy scenario is that the uncertain economic and financial environment has prompted more firms to engage in talks about M&A and raising cash through asset sales. The Middle East is suddenly seeing a resurgence of international private equity firms who are trying to engage in bigger transaction deals. There are bright spots albeit seen a bit sporadically but the potential for M&A is still there.
Another major reason for the M&A deals not going through is that potential sellers are often loathe to part with their assets since the business is family-owned and there is a lot of attachment to assets. The attachment is often only sentimental and has nothing to do with economic viability. Also, in some instances, sellers are often promised higher valuations but after a year or more of negotiations and deals running through, the buyers realise that the valuation has to be reduced to match changed economic situations. This is often not acceptable to the sellers who were expecting a higher price for their assets or stake sale. This just means that either the deals don’t get closed or fall through mid-way since the buyers and sellers fail to reach a middle-ground in terms of negotiations.
So, we have seen the reasons why experts feel that the global M&A boom has largely passed over the Middle East and Dubai. Yet, not all is lost and there is still hope as the region’s private equity market is pushing up the valuations; this is especially true of consumer-centric, health care and education sectors.