In 2015, global merger and acquisition (M&A) deals set a record in terms of the value of transactions reaching almost US$5 trillion, through globalization of the M&A market and the emergence of Asia Pacific as a significant factor. BURAK GENCOGLU takes a look at what transpired in 2016 and what to expect in 2017.
Following the record transaction volume in 2015, M&A activity again proved its strong presence in 2016 despite the instability and uncertainty brought about by global economic, political and regulatory conditions. Although deal values decreased by 24% until the third quarter (Q3) of 2016 when compared with 2015’s record-breaking number of transactions, it is considered stable compared with the same period in 2014.
During 2016, M&A deal values in the Middle East also increased and showed a relatively successful performance compared with the previous year.
Review of 2016
The confidence in the business world during 2014 and 2015 has been affected by the ongoing economic weakness and the UK’s decision to leave the EU which have a significant effect on M&A activity. Within the year, some transactions were also blocked because of competition or other regulatory reasons. With regards to the deal value concerning global M&A transactions carried out in 2016, the data indicates that the decline was driven by the European target which fell by 26.5% in terms of 2016 second quarter data.
The number of transactions cancelled or failed to be completed also increased significantly, amounting to a total of US$687 billion up until Q3 of 2016. The announcement of stricter rules on tax inversions by the US Treasury Department and other restrictions set forth by the competition authorities contributed to the current situation. However, it is not only the stricter regulations and rules of the public authorities that are involved but also the said economic and political concerns, such as the effects of Brexit, the US presidential race and the slowdown in the Chinese economy. It is also another challenge to agree on the provisions of M&A transactions and reach an agreement due to high public company valuations.
In terms of the M&A sector in the Middle East, data until Q3 of 2016 shows that the value of announced M&A transactions with any Middle Eastern involvement reached US$37.4 billion, a 19% increase when compared with the same period in 2015 as stated by Nadim Najjar, the managing director of MENA at Thomson Reuters. Unlike global M&A deals, in the Middle East the valuation expectations between sellers and buyers are narrow which increases the number of deals within the region.
With regards to country performances in the Middle East, Qatar was the most active country with regards to outbound M&A transactions in the Middle East, achieving 41% of total outbound transactions in the region. Following on Qatar’s heels were companies based in Saudi Arabia and the UAE with a market share of 34% and 11% respectively.
The merger of the National Bank of Abu Dhabi (NBAD) and First Gulf Bank (FGB) was the largest M&A transaction so far in 2016 having a value of US$14.1 billion within the region. The said transaction was also recorded as the Middle East’s largest domestic deal of all time and made a significant contribution to the total 2016 M&A deal value.
Preview of 2017
M&A activity globally mainly depends on the certainty and confidence of sector players in the world’s economic and political stability. Having said that, M&A dealmakers are of the opinion that the UK vote to leave the EU and the US presidential result will have a minor effect on M&A deals in 2017. Additionally, the election of Donald Trump as the 45th US president is expected to have a relatively more positive effect on M&A transactions when compared to the other presidential candidate, Hillary Clinton.
One of the obstacles for the execution of M&A deals is tightening global competition law regulations and enforcement, and the need to satisfy competition authorities within multiple jurisdictions. This situation creates the risk of a longer time for M&A deals to complete the transactions and the risk of adverse reception in one of the jurisdictions.
Overall, Europe has been losing its attractiveness where investors from the Middle East are concerned since 2013. In the second half of 2013, while 57% of the deals and 63% of the transaction value were spent in Europe; the figures dropped to 45% and 22% respectively during the first half of 2016. While M&A capital from the Middle East spent in Europe fell, the share of the Americas increased to 29% in terms of the number of deals and 47% in terms of the transaction value. The current trend is expected to continue in the following years.
In summary, it is likely for the Middle East and international markets to remain active despite global changes in the political and economic environment in the coming months. Additionally, it is expected that North Africa will continue attracting M&A investments due to its growth potential. According to the World Bank, Egypt, Morocco and Algeria – the top three economies from North Africa – grew more than the world average, making them important for Islamic finance-related activities and M&A transactions.
It is also expected that the Middle East region will see more domestic M&A deals since smaller companies may seek M&A opportunities to improve their liquidity and profitability under one larger firm. The NBAD and FGB merger may pave the way for such transactions with this intention.