By Scott Cairns
Despite the pandemic-inspired market uncertainty in a range of sectors, it seems that many companies have taken the opportunity to grow
With all the financial uncertainty in recent months, predictions of a slowdown in M&A activity were no surprise.
Still, we’ve actually seen a different story suggesting companies have seized opportunities to consolidate and grow. We recorded a significant increase in M&A interest among clients, with a YoY increase of more than 300 percent since 2019. In the last quarter especially, M&As have played an important role on the region’s road to recovery.
The most notable activity is in the medical, pharmaceutical, hospitality, real estate, technology, and logistics sectors. Healthcare/pharma is an obvious choice right now, with investors seeing nothing but positive returns and growth in the short to medium-term.
Covid-19 has also forced a re-think of how healthcare businesses are managed; there has been some consolidation to reduce overheads and squeeze additional profits as another driving factor in the active market.
For buyers with access to excess liquidity, distressed sales are a definite go-to. Within the hospitality arena, bargain hunters are looking for hotels that they deem under-priced due to the turbulent times affecting tourism. Most of the interest is focused on three and four-star properties, especially in Dubai. However, investors are considering other emirates as well.
These underpriced assets, with underperforming retail spaces attached, have the potential for massive gains when the market picks up.
Similarly, bargain hunters are looking for commercial properties that have dropped dramatically in price. A knock-on-effect is a rise in the number of company formations for both JAFZA offshore and ADGM SPVs that we are conducting for clients to hold these assets.
The IT/tech space is consistently active, irrespective of the market conditions, and this year has been no different. Food delivery services have surged in value attracting high levels of interest, as smaller players continue to emerge, and larger conglomerates purchase agile competitors before they absorb too much of the market share.
Elsewhere, IT businesses involved in the remote learning sector are going from strength-to-strength. While we haven’t seen as many deals in this space yet, once companies have time to catch their breath from handling oversubscribed services and unprecedented demand, their focus will be on targeting opportunities to expand their reach.
With the booming e-commerce industry helping companies like Amazon jump in value (up nearly 70 percent since the market dip in March 2020), companies that support this sector are also an attractive M&A target. We have received multiple queries for the purchase of operating logistics companies in the UAE and wider GCC region. Some are looking to expand their service offerings, and others want to grow their already profitable and lucrative businesses in the shortest possible timeframe.
M&A investment is coming from different origins. A number of private equity firms have built up considerable cash and liquidity while holding off making investments, mainly due to market instability. The NASDAQ dropped 34 percent in March, following the highs it experienced in February 2020, but for the most part has now recovered those losses into August. This trend has given a boost to investor confidence, which is has been reflected in a flurry of M&A activity.
Along with PE investment, we have seen multinationals taking an active role in pursuing local acquisition targets. It appears this is part of a strategy to drive sales from new regions by purchasing existing players, rather than taking the traditional path of opening a new company in the UAE and slowly gaining traction by growing organically.
Companies that failed to plan for an unpredictable market back in March represent many of the ones we now see for sale. This is more than just a market exit strategy; it’s a deliberate move to receive a return on investment rather than being forced to close their doors completely. On the flip side, those companies with a solid business model and comprehensive crisis plans are now in a position to take advantage of struggling entities to turbo-charge their results for the second half of 2020.
The above observations are based on the queries and mandates Creation Business Consultants has received and worked on over the last few months. We have been able to identify several target companies for purchase and are assisting several sellers in divesting, which is proof enough that it’s both a buyers’ and sellers’ market at present.