M&A activity in Mideast set to pick up in 2010

Mergers and acquisitions in the Middle East, that saw a drop of more than 40 per cent last year, are expected to pick up in 2010 and most of them would be synergy driven, analysts told Emirates Business.

M&A activity worldwide was hit last year and a new round of merger activity is expected this year. Banking and real estate sectors would be more active on the front, the analysts said.

"Operationally driven mergers and acquisitions are likely to pick up this year. Most of the industries are under heavy competitive pressure, they will seek to complement their portfolios with new capacities-enter new product lines, new geographies," said Dr Dirk Buchta, Partner and Managing Director, AT Kearney, Middle East.

"If those corporations are widely diversified family owned conglomerates, they would want to have a relook at their businesses and be more focused; which would driver mergers and acquisitions further. We would see more mergers and acquisitions with an industrial logic behind it," he added.

A recent analysis by Thomson and Reuters showed that at the height of the 2007 boom, Middle East mergers and acquisitions exceeded $40 billion (Dh146.8bn).

In 2009, they fell to less than $13bn. Compared to last year, activity was down by 40 per cent.

Amid tight liquidity conditions and stiff competition, companies became very conscious of cost control.

However, changes in strategies, restructuring and other measures are expected to be implemented this year, the analysts said.

"The whole issue of cost reduction came up last year whereas prior to the crisis that was not the case. This approach would continue in 2010 and probably 2011 too, it would get more emphasis and we would see companies implementing restructuring strategies," said Dr Buchta.

"At the same time, with higher oil price and investor confidence that has returned, would drive the activity. Compared to last year when there were fewer growth projects, this year we would see return of growth projects. There is an optimism as oil price is shooting up towards $100 a barrel mark." Funding strategies for the mergers, however, would be different than what they were prior to the crisis, according to a recent report.

A new wave of mergers will likely take place in 2010, though bidders will rely less on aggressive debt-funded leverage to finance these acquisitions than they did before the downturn, a recent Standard and Poor's report.

"Companies will undertake acquisitions to contain costs and achieve synergies in the long term," according to the report."

Companies based in emerging markets might initially dominate as cross-border acquirers as they seek opportunities from lower valuations in more mature markets, said the report.

"India-based Reliance Industries' bid for a controlling stake in Netherlands-based LyondellBasell Industries in early November is one example of this. Chinese issuers also have reportedly been eyeing cross-border acquisitions, not only in the natural resources sector but also in other industries.

"In mature markets, companies might remain more cautious about cross-border merger activity if financing conditions remain difficult," it said.

In the region, companies would look into financing from their own cash flow, said the analysts.

"Because outside money is more costly and more tough to get, corporations would look into financing from their own cash flow, many of them would look into opportunities in cost reduction, we clearly see that it in our discussions with our broad client base in the region."

"We can expect more consolidations in sectors such as real estate and finance. In real estate, companies would seek new sources of profitability, many of them would want to enter service sectors; there would be mergers; more transactions and they would reduce their diversification index."

 

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