By Jassim Alseddiqi
Predictions For 2020: M&A is becoming a viable way to scale up a business, realise synergies and achieve cost efficiencies
The year 2019 was a momentous one for me personally and professionally, marked by the successful merger of ADFG and SHUAA to create a regional financial services powerhouse.
We consider mergers or consolidation a viable way to scale up one’s business, realise synergies and achieve cost efficiencies. But that doesn’t mean the road to a merger is easy. If anything, it’s a path filled with potholes, humps, and U-turns. The only way you can steer your way through it is by planning prudently, constantly reminding yourself why you chose to take that journey in the first place and keeping your sight on the horizon. If you believe that, at the end of the road, you’ll find something of enormous value and impact, you’ll keep going.
That was just my mind frame when we started the ADFG-SHUAA merger discussions and planning early last year with the regulators, advisors and the team of course. It was one of the rare cases in the region where a private company was planning to become public through reverse acquisition, and, needless to say, it required a different level of thinking and a complete shift in mindset.
As part of the team that led the ADFG-SHUAA merger and other constructive acquisitions, and with many lessons learned along the way, I will share my perspective on the region’s remarkable M&A activity this year and what I believe the horizon for 2020 will look like.
In addition to the ADFG-SHUAA transformational merger, many other significant transactions made 2019 a milestone year for M&A transactions. Of course, the one that tops the list is Uber’s acquisition of Careem in a $3.1 billion deal after months of negotiations. This was a significant cross-border deal that demonstrated the success and attractiveness of start-ups in the region, not to mention the increasing appetite by international companies to do business in the region, fueled by laws and regulations designed to make such business easier. But that is only one of many significant examples. Within the UAE’s banking sector, for example, we saw the combination of ADCB, UNB and Al Hilal Bank. And in Saudi Arabia, Aramco’s acquisition of SABIC recorded the highest deal value with $69.3bn.
As per the latest data, the value of announced M&A transactions with Middle Eastern or North African involvement currently stands at an all-time high: $120.6bn by the end of Q3 2019, up 160 percent from the same period in 2018. Deals with a MENA target stand at $104.7bn, up 289 percent from last year, while deals with an inter-MENA target represent $88.2bn, up 584 percent in the same period. Domestic and inbound deals all stand at all-time high volumes as well: $16.4bn, up 18 percent from last year.
Most of these transactions demonstrated a significant change in mindset – where regional entities, especially legacy ones, pragmatically realised that consolidation can enable them to capture opportunities they couldn’t pursue on their own.
While there was all this positive talk and momentum about some of the deals seeing successful completion after prolonged negotiations, there were a few that didn’t work out in a way the market had hoped for – a case in point, the recent scrapping of a merger deal between National Commercial Bank and Riyad Bank. But that doesn’t mean the effort was in vain, as all deal negotiations are valuable learning experiences.
"My view is that even if concerns are on the rise because of global uncertainty, investors continue to be confident about the prospects of the MENA region"
Recently, S&P came up with an interesting viewpoint that the first banking M&A wave in GCC (which started in 2007 with the creation of Emirates NBD), led by the ambition to drive scale and size, may have lost steam, with the exception of Dubai Islamic Bank’s takeover of Noor Bank and the much-awaited unique cross-border deal involving Kuwait Finance House’s proposed buy-out of Bahrain’s Ahli United Bank.
That said, I’m of the view that downturns are the best times for deal-making. Our experience has shown that with prudent planning, systematic execution and intrepid decision-making, rocky roads can turn smooth.
Despite what the global and regional market conditions may be, I believe several trends will give momentum to the region’s M&A activity.
First, the region’s governments are leading initiatives to diversify away from a dependency on oil and gas revenues. These imperatives are pushing energy and power companies to pursue economies of scale, cost-cutting and synergies through mergers. In addition, GCC companies are likely to increase the scope and speed of their foreign acquisitions - an example of this is Aramco’s acquisition of Dutch chemical company Arlanxeo in 2018.
Second, there is a continued emphasis on consolidating assets either owned or controlled by government entities but operating independently.
Third, the continued efforts by the government to attract foreign investment flows into the region, particularly with the UAE and Saudi relaxing foreign ownership limits, will also have an impact on the M&A activity.
And fourth, I expect the consortium deals back in fashion in global markets to soon become popular again in the MENA region. Consortium deals that involve both international and local players would bring a lot of value to key sectors such as technology, healthcare and education. In addition to providing cost and operational efficiencies, they are ideal for companies seeking to increase capabilities that they cannot replicate in-house in order to remain competitive.
So, my view is that even if concerns are on the rise because of global uncertainty, investors continue to be confident about the prospects of the MENA region. With the milestone transactions and deals that transpired in 2019, I expect 2020 may very well turn out to be another vigorous year for the region’s M&A sector.