Middle East deals
Opinion

M&A in the Middle East: key drivers and challenges

(Last Updated On: March 6, 2023)

“Buying the slave instead of growing him up” is an old Arabic aphorism that advises acquiring objects over creating or building them.

We can notice the application of this aphorism in today’s business practice not excluding the Arab business world.

Taking Saudi and UAE markets, the biggest among Arab economies, as examples will show the tendency of those markets to use M & A transactions as shortcuts to achieve a desired strategy, growth rate, or market share expansion.

Regulations

Looking into the continuously improving business-related regulations in Saudi Arabia will show how the regulators are keen to attract investors to direct a part of their investments into the biggest Arab economy.

The regulation structure is considered young compared to the European’s, so the chances or the room to improve is large, recently the company’s law along with the merger and acquisitions regulations was amended positively, also the Saudi Privacy and Data Protection is going to take effect starting March 2023 which is considered as an important change in the Saudi regulation structure.

The recently amended Saudi Merger and Acquisitions regulations became more comprehensive and flexible compared to European regulations. Competition is supported in the M&A regulations by referring to the comprehensive competition regulations which were reformed and improved a few years back.

However, the competition regulations include a unique flexible article that may waive the investor from the competition regulations provided that a special committee’s report – assigned by the General Authority for Competition – confirms the existence of a pre-defined list of improvements that exceed the impact of the limitations on the market competitiveness.

The European competition regulations distinguish between the horizontal and vertical M&A and include smoother limitations in case of a non-horizontal merger where the post-merger market share is below 30%, however, the regulations in case of a horizontal merger are tougher, strict, and complicated, and may prohibit a merger if the post-merger market share exceeds 25%.

Comparing the European competition regulations with Saudi regulations will show a more flexible Saudi regulatory environment which may allow a post-merger market share below 40%.

Key drivers

Businesses around the world have numerous reasons behind Why they merge or acquire, local culture may change the behavior or the mechanism of deals’ execution, however, the rationale or the motivation for the merger or acquisition are almost the same, although it is not prohibited by the regulations it is uncommon or rare to experience a hostile acquisition in the Arab world, however, it can be noticed in several instances worldwide e.g. Twitter 2022.

Strategy driver

Growth, market share, expertise, innovative abilities, can be considered as strategic objectives behind a merger. An acquirer may be Seeking to achieve a specific growth rate and prefers to achieve it through acquiring horizontally mainly to increase its market share, or vertically to achieve a cost reduction or efficiency.

Additionally, an acquirer would seek to acquire a target business with expertise, research & development capabilities, or technology that would be impractical to be developed internally.

The acquirers also may be fostering a strategy to diversify or acquire a business that’s activity is unrelated to the acquirer’s business, which became an almost obsolete strategy nowadays, however, it is still an acceptable strategy in the Arab world and is noticeably practiced.

Speculative investments

Investors may also seek to acquire a business that is expected to create value and can be resold later with a premium.

Financing

This driver is a flipped one since it may be sought by the target in its search for a source of finance, several promising businesses lacking financial resources, while their creditworthiness doesn’t allow them
to be financed through bank debts.

Mergers & acquisitions failures

No market can claim that M&As are generally successful within that market since it is a complicated process to be executed starting from the formation of the strategy to acquire or merge instead of developing internally, till the phase of integrating the target.

The M&A success measurement itself is a challenge, the creation of short-term or long-term measures is not an easy task, sometime the decision maker may decide to de-merge or resell the acquired target before long-term measures can be applied due to the failure to achieve the acquirer’s expectations in the short-term, or the failure to achieve the desired synergies.

Examples of the causes of M&A failures

The merger may fail before even commencing due to the failure to agree on the terms of the merger.
The acquisition may also be blocked or refused by the target’s Shareholders, while a hostile acquisition is uncommon or is unwelcomed by the Saudi or Arabic culture.

Competition regulations violation may cause the merger or the acquisition to be blocked by the regulator.
Improper strategy can take several forms, including having no conscious strategy behind the acquisition, or deciding to acquire without the alignment of the target within the acquirer’s strategy.

Moreover, the acquirer may fail to integrate the target within its business processes or may fail to control the enlarged business due to the lack of maturity.

Culture differences are a very important cause of M&A failure, especially when an Arab business acquires or is being acquired by a foreign business due to large cultural differences, however, with the current improvements noticed in both the Saudi and the UAE’s markets those differences are thought to be shrinking.

  • Unrealistic desired synergies
  • Improper due diligence on inaccurate target evaluation.
  • Poor post-merger financial decisions
  • Leverage or poor debt position

The regulatory environment in Saudi Arabia has improved and become more flexible compared to European regulations, allowing for a more comprehensive approach to M&A. The article also examines the key drivers behind M&A, including growth, market share, expertise, innovative abilities, speculative investment, and financial necessity.

M&A can fail due to various reasons, including improper strategy, improper due diligence, poor post-merger financial decisions, and cultural differences. Overall, while M&A can be a valuable tool to achieve strategic goals, it requires careful planning, due diligence, and integration to ensure success.

Dr. Mohamed Abdelhameed has more than 15 years of a leading multi-disciplinary consultancy, academic, and research experience in impact investing, development finance, green banking, and sustainable development as well as the implementation of green lending facilities led by international financial institutions such as the EBRD, EIB, AFD, WBG, etc. He has a proven track record in the management of green credit lines in the Egyptian market.Dr Mohamed has solid experience in climate finance and used to provide advisory support to banks with respect to strategies' incorporation within the internal credit risk appraisal process.