M&A deals back on Middle East's agenda

At the beginning of the year, MENA executives were hitting the pause button on M&A deals. Macroeconomic uncertainty had dampened M&A enthusiasm and had executives thinking twice about closing deals. However, there has been a recent turn in sentiment and a cautious enthusiasm to increase investments.

The latest Capital Confidence Barometer report from EY finds that 47% of MENA executives expect deal activity to increase in the next year. In the first quarter of 2017, there were 80 M&A transactions on the go, versus the average number of 100.

Yet executives are positive about the quality of deals, deal flow and the number of transformational deals in certain sectors. 41% of respondents indicated they have five or more deals in the pipeline, and 44% expect this number to increase over the next year.

Expectations around transaction completions are also up, with 54% of MENA companies looking to close deals over the next year. The improving economy, recent track record of focusing mainly on organic growth, and the reassessment of company portfolios has executives reconsidering their restraint on deal-making.

For MENA companies, improving economic conditions are a contributing factor to the growth in deal-making. 48% of respondents feel more positive about the global economy, and 57% of executives feel more positive about the local economy.

The recent pick up in positive economic releases coupled with very strong Purchasing Manager Index survey results, is underpinning a strong upturn in the percentage of executives who see the economy as improving.

However, MENA companies are struggling to secure loans as liquidity among banks and other financial institutions continues to be tight. This is expected to improve as some countries look to increase interest rates.

Despite this, executives expect a slowdown in global trade flows and an increase in protectionism, fluctuations in currencies and capital markets, and increasing geopolitical uncertainty as significant economic risks. Increasing government intervention in the region, both by establishing new laws or regulations, or through vocal public pronouncements, could impede economic growth.

When it comes to growth objectives, market volatility and lower oil prices have 54% of MENA executives looking at organic opportunities first. However, given the new taxes that some of the Gulf has imposed, and the difficulty in bringing skilled labor into the country, many companies are turning to automation.

But they are not looking to reduce their workforce. For companies seeking to implement digital innovation, 26% say one of the main challenges is the change management needed to implement a new culture.

Disruptive forces and potential changes in trade policies are also compelling MENA companies to be more responsive in their portfolio and operational reviews. Public sector companies and governments are looking at significantly restructuring their portfolio mix, as they look to invest beyond healthcare and education.

In the private sector, businesses are inclined to invest based on intuition and perceived brand value, and therefore may be less likely to undertake regular portfolio reviews. This, combined with the historical bias within MENA family groups away from asset disposals, may explain why 66% of MENA executives have increased the frequency of their portfolio review process to capitalize on disruptive forces.

While geopolitical and policy uncertainty is a permanent feature of a globalized economy, technology-enabled disruption poses a greater challenge to many business models.

Therefore, executives must learn to live with uncertainty and disregard boundaries as cross-border deals are a necessity for growth. New products and services are being created at pace and organizations need to reconsider unnecessary constraints to make today’s deals the game-changers of tomorrow.

With M&A deal-making on the rebound, it will be critical for MENA companies to address the digital innovation and disruptive technologies that affect their existing business models to futureproof their businesses.

As oil prices continue to stabilize, and government initiatives foster greater economic certainty, MENA executives are feeling more optimistic that the economic conditions are right to return to deal-making.

Add to this the fact that pipelines remain robust and companies are feeling good about the quality of deals in the market, a significant uptick in deal activity over the next year can be expected throughout the region.

Phil Gandier, MENA Transaction Advisory Services Leader, EY.

Original Source: Forbes