Nader Museitif, global director of M&A and franchising at Aramex, discusses the long-term outlook for global and regional dealmaking in 2015.
Global M&A deal values hit a new monthly peak of $1.85 trillion in May, up 19% year-on-year, and if the boom continues we are likely to see a record year for M&A volumes; exceeding the $4.6 trillion worth of deals made in 2007.
The picture is equally promising in the Middle East and Africa (MEA) region, with deal values jumping 33% to $27 billion from a year earlier. The energy, technology and industrial sectors accounted for the biggest share of activity.
One strong factor in the M&A rush is the supply of cheap money. Dollar-based cost of debt can reach as low as 3% and even lower for blue chips. Companies are taking advantage of available liquidity by growing their war chests and using the cash for investment opportunities or simply sitting on it for adverse squeezes that might arise subsequently during down cycles.
In addition to prolonged cheap capital, currencies in emerging markets have dropped to exceptional levels. Countries like Kenya, South Africa, Egypt, and Turkey have seen their currencies weaken as much as 50%. With U.S. dollar-pegged funds, regional investors may find some favorable pricing entry points into new markets with good long-term potential, stable political structures, growing young populations, and developing regulatory frameworks.
Mergers and acquisitions remain an integral part of corporate strategy and we expect to see more deals in the second half of the year. While the big part of global M&A is usually concentrated in the United States and Europe (more than $1.57 trillion so far this year), there is continued interest in acquisition opportunities in growth economies despite negative regional pressures and the somewhat divergent performance between U.S., European, and Asian economies.
The Middle East remains volatile with political instability in Iraq, Syria, Yemen and Libya increasing the risk of prolonged regional unrest and leading many investors to adopt a wait-and-see stance. The drop in oil prices has also dampened sentiment.
But investors focusing on the long-term have achieved returns beyond the short-term blips; oil prices have rebounded well and seem to be hovering around a reasonable range, while regional indices have rallied since the lows of last December / January (although they have not returned to 2014 highs).
Many strategic acquirers see the current M&A environment as a good setting to expand beyond their traditional markets. This is the case for many regional corporates eyeing acquisition opportunities in Africa and Asia.
But M&A comes with its risks, no less so in emerging markets.
Global markets are ever more interconnected, creating new levels of complexity that challenge long-adopted models. Such complexity can be more taxing in emerging markets than developed ones. But regional corporates are by definition attuned to higher risk thresholds. A long-term strategic acquirer adopting clearly defined investment criteria can see some interesting beta in new markets.
M&A buy-side teams, as ever, should have clear guidelines on what constitutes good investments. Valuations in some sectors can be somewhat overstretched. Therefore acquirers should not compromise on ROI metrics, they should keep the P/E multiples in check, avoid falling in over-speculative valuations, and ensure a rigorous post-deal execution and risk management approach. Investment models should also take into account continued volatility related to factors like currency corrections, fast-changing global demand dynamics, and unfolding events during the second half of 2015.
While volatility is a natural part of markets, it is safe to assume that the drivers behind the current record boom in M&A will not hold forever. A balanced and long-term M&A strategy can be an effective means for corporates to benefit from the upside and to diversify returns during a down cycle.
Nader Museitif is Global Director of M&A and Franchising at Aramex - leading Aramex expansion and investment activities in growth markets across Africa, Asia, Middle East and Australia. He holds an Industrial Engineering from University of Toronto and an MBA from Cranfield School of Management. He can be reached at nader.museitif@aramex.com© Zawya 2015
