Middle East mergers and acquisitions show signs of upswing

While 2010 was a tricky year for the UAE's stock markets, the country remained one of the hot spots for mergers and acquisitions. The Dubai Financial Market lost 9.60% in 2011, while Abu Dhabi's local bourse, the ADX, dipped 1.21%. As a consequence, more than a dozen brokerage businesses were forced to quit the market amid dwindling trading activity.

Regarding mergers and acquisitions (M&A), however, the UAE remained a hot spot. "M&A in Africa and the Middle East saw 306 deals worth a total of $49.7bn in 2010, up 54.2% by value and 7.7% by deal count - the highest annual deal value since 2007", says London-based mergermarket in its recently published report "League Tables of Legal Advisers for Year End 2010".

Regarding the Middle East, Thomson-Reuters says in its lasted deals intelligence report that "Middle Eastern M&A, based on target nation, reached $31bn, more than double the activity seen during full year 2009, and the busiest year since 2007. More than 500 deals were announced in the region during 2010."

With a share of 58.4%, the bulk of M&A acquirors were based in the UAE, followed by Qatar (11.4%) and Egypt (4.0%). The top 10 Middle Eastern M&A targets were in Kuwait (46.3%), while the UAE was second (15.1%). Co-operations, Joint Ventures and mergers usually are on the increase after a recession. Firms lose market shares and look for new partners, while well-established brand names face bankruptcy and look for a "white knight" to save them. Small market participants also decrease in value and are lying on the bargain table.

According to Says Sankar Krishnan, Managing Director Middle East of Alvaraz & Marshal, a leading restructuring consulter, at some large retail companies running supermarkets in the GCC, turnover plummeted by 40%.

M&A pitfalls

In 2010, M&A fees stood for 47% of total investment banking fees, down from 55% in 2009, but a bit higher than in the last boom years in 2008 (44%) and 2007 (45%). Looking ahead M&A, however, is not always win-win. Germany's first car producer Daimler called off its marriage with Chrysler in 2007, after the 1998 "marriage in the automaker sky" not only did not create shareholder value, but nor did it lead to synergies.

A decade before, Daimler's rival BMW also had to learn that buying Rover was more difficult than it looked on powerpoint presentation slides. Or take Swiss bank UBS's move into the US, when it bought investment bank Paine Webber in the year 2000. The conservative Swiss bankers did not quite follow the American world hedge funds, which eventually led to a near-collapse of UBS at the outbreak of the financial crisis in 2008 (only the Swiss central bank could save UBS from bankruptcy with a $60bn bailout, after UBS lost within 12 months more than its owned capital).

Back in the Middle East, "Telecommunications is the most targeted industry in the Middle East with $13.2bn, 43% of the activity up from $5.2m year", according to Thomson-Reuters. But although the segment of mobile phone frequencies is easier to manage than a merger between car manufacturers from different continents, well-known firms also face hurdles. The UAE's first telecom provider Etisalat faces more hurdles to take over Kuwait's Zain and still intends to do so, although Etisalat missed the January 15 deadline to complete due diligence. Russia's Vimpelcom still tries to find ways to buy into Egypt's giant Orascom Telecom for $6.6bn, a move which triggered fierce resistance of Orascom's Norwegian shareholder Telenor.

However, ongoing negotiations such as these show that the Middle Eastern economy is vibrant and tries to achieve economies of scale, and it shows to which degree the region is already connected to the world. But there is still room for potential. According to mergermarket, the mix of announced deals by geographic region in 2010, the Middle East and Africa accounted for only 2.5% globally.