The MENA region has witnessed a steady growth of M&A activity in 2012, the resultant effect of which has been a peak in investor sentiment. The current market favors corporates and accordingly, corporates/strategic investors remain the most active in the M&A arena.
Of late, a wait-and-see approach was assumed. However, as it is has become considerably more challenging to generate enhanced revenue through organic growth, corporate institutions are not in a position to wait for improved market conditions and have no alternative but to turn to inorganic means to develop their businesses.
Corporates have become more desirous of acquisitions, dilutions, divestments and/or mergers that result in the identification of the right party and bring specific strategic advantages such as heightening top-line growth, geographical expansion, development of new product lines, and/or the achievement of better economies of scale. These corporates want to ensure that their businesses benefit from potential strategic, financial and operational synergies.
In contrast, the re-emergence of the private equity investor in 2012 had minimal impact on the revival of the MENA M&A market. PE firms have clung to their portfolio companies for some time hoping for improved market conditions. To reiterate, corporates looking to dilute or partially exit their investments prefer strategic investors that are capable of adding noticeable value to their businesses through potential synergies.
The involvement of PE investors is therefore curbed in a majority of transactions. Despite this, the increased pressure to monetize their investments - coupled with the need to make essential returns for their shareholders - means that there is a further likelihood that PE firms will play a greater role moving forward. Many regional funds are close to their maturity dates and we anticipate that a large percentage of limited partners will exercise their option to exit.
Cautious optimism
Although there is substantial interest in the M&A market from both corporates and PE investors, cautious optimism is required as there appears to be more buyers than sellers. More notably, buyers have almost equivalent investment criteria and are concentrated on the same industries, namely food, healthcare and education. Isolating appropriate targets is a constant challenge and competition is rife among buyers for lucrative businesses operating in the abovementioned industries.
In addition, there is still considerable uncertainty as M&A transactions remain extremely complex and arduous to close. Both the pre-letter of intent and the post-due diligence periods have become lengthier than the average historical period.
Moreover, recessionary fears and a slow growth environment have made it difficult to predict the volatility of future revenue streams which contribute to prolonged deal closures. Similarly, deal term negotiations have grown in difficulty as, in an effort to mitigate downside risk, both the buyer and the seller combined have become more risk averse in their approach.
Investors, in their relentless quest for revenue generation, have become more astute and disciplined in their approach, often reevaluating their strategy, finding new alternatives or adopting a wait-and-see methodology.
With rising investor expectations and fewer deals available in the market, the pattern of M&A activity has changed. Investment banks have to constantly demonstrate that they have superior experience in planning, carrying out, and integrating M&A transactions in order for them to secure and execute transactions.
As novel trends emerge, we will bear witness to a new landscape that will see only the most competent investment banks thrive in this ruthless environment. The M&A market is tumultuous and demanding, and only those investment banks with a distinct competitive advantage in the form of a proven track record will survive.
Hadi Al Hakim is executive director at Dubai-based Alpen Capital. He has led and managed the execution of public and private cross-border M&A deals with a total value exceeding USD 3.6 billion.
© Zawya 2013
