Winning Combinations

George Hojeige, CEO of Virtuzone describes the flourishing M&A scene in the region, while highlighting that such activity is not just the preserve of big corporations, he shows that it can also be an opportunity for start-ups to add key strengths to their business.

A closer look at MENA’s M&A activities: Deconstructing successful M&A deals and exploring opportunities for start-ups

The recent year has been marked by a resurgence of economic activities in the region, signalling a positive trend towards widescale post-pandemic recovery.

One such activity that has gained velocity over the last year is Mergers and Acquisitions (M&A) in the Middle East and North Africa markets, which recorded a total of 661 deals amounting to USD 99 billion in 2021. This represents a 66% increase from the 397 M&A deals made in 2020, valued at USD 85.2 billion, according to a report released by international accounting firm Ernst & Young.

Concluding 303 M&A deals in 2021, the United Arab of Emirates ranked first when it came to volume, whereas the Kingdom of Saudi Arabia brought home the biggest M&A capital, with a value of USD 47.4 billion.

The report also credited government-related entities for executing the majority of the deals, which accounted for USD 62.6 billion (63%) of the total annual deal value. On the other hand, private equity participation also increased, with 165 deals in 2021 compared with 73 in 2020.

MENA’s outstanding M&A deals in 2021

Saudi Arabian Oil Company (Aramco) sealed one of the biggest M&A deals last year with EIG Global Energy Partners, one of the world’s established capital providers to the energy sector, and Mubadala Investment Company, a state-owned sovereign wealth fund in Abu Dhabi.

The USD 12.4 billion energy infrastructure deal gave the consortium of international investors a 49% equity stake in Aramco Oil Pipelines Company, a newly formed subsidiary of Aramco.

Aldar Properties, one of the UAE’s biggest real estate developers, together with Abu Dhabi Developmental Holding Company (ADQ), a key holding company and strategic partner of the Abu Dhabi Government, made headlines in 2021 when they invested USD 388 million to acquire a majority stake (85.5%) in Sixth of October for Development and Investment Company (SODIC), one of Egypt’s leading real estate companies specialising in high-quality residential, commercial and retail property.

Another prominent M&A deal finalised in 2021 was First Abu Dhabi Bank’s 100% acquisition of the Egyptian subsidiary of Bank Audi, a Lebanon-based bank and financial services company. First Abu Dhabi Bank, the largest bank in the UAE, reportedly has assets valued at USD 267.6 billion as of 2021. After completing its first international acquisition, FAB Egypt is expected to be one of Egypt’s largest foreign banks based on total assets.

The common denominator in these M&A activities is that they place investors in a stronger industry position, give them access to new markets beyond their borders, and present opportunities to gain a larger global market share.

However, M&A activities are not purely to the benefit of multinational corporations and established businesses. Start-ups can also leverage the opportunity to scale their businesses, increase their capital, and adopt new technologies through M&A.

Scaling through M&A: Why start-ups should consider value creation through M&A deals

A strategic M&A deal can help start-ups replenish their capital by giving them access to new funding sources, which can then fast-track the development and deployment of new products and services.

Aside from fresh funding, M&A can open up opportunities for innovation through the adoption of new technologies and systems that were previously inaccessible or unavailable to the acquiring or target company.

Start-ups aiming to accelerate their growth and quickly expand their operations can turn to a carefully evaluated and executed M&A deal to increase their value as an organisation and significantly enhance their competitive edge in the market. For example, Facebook cemented its position as the dominant social media platform in the world when it acquired Instagram for USD 1 billion in 2012.

Today, Instagram has over 1 billion users, is estimated to be worth more than USD 100 billion as a company – 100 times the price Facebook bought it for – and accounts for more than 36% of Facebook’s total revenues, according to recent figures.

Tactical M&As can also place companies in a position to capture new markets and extend their global reach. In 2017, Amazon successfully entered the Middle East market by acquiring Souq – dubbed as the Amazon of the Middle East and the region’s largest e-commerce platform – for USD 580 million.

Amazon has now established itself as an e-commerce powerhouse in the Middle East, with a total of 57 million visits every month.

The key to a successful M&A

Having a clear vision and goal for any M&A transaction is a foremost requirement of a successful deal. According to an article published by Harvard Business Review, the failure rate for M&As is around 70% to 90% – and one of the potential major causes is that executives fail to correctly match candidate companies with the strategic purpose of the M&A.

One of the golden rules of M&A is, therefore, to identify the long-term objectives of a company and meticulously examine an M&A deal and determine if it aligns with one’s overarching corporate strategy. Experts at McKinsey & Company, a management consulting firm based in New York, also advise that executives create an M&A blueprint that clearly outlines and communicates why the M&A is needed, where it will create value and how it will be integrated.

Another integral part of a successful M&A is performing due diligence and planning ahead. In addition to determining if an M&A deal matches a company’s corporate strategies, it is equally important to evaluate all the risks involved in the transaction and scrutinise the target company. Evaluate the target company’s financial statements, leadership and management committee, cybersecurity protocols, intellectual property assets and rights, its reputation and corporate image and even its company culture and talent pool.

While finalising the terms of the deal and investigating the fine details of the agreement are crucial, executives must likewise take the time to develop a concrete, comprehensive and scalable plan for implementation and integration.

Guided by a clear and realistic timeline, the unification process must indicate the key objectives and milestones for integration and ascertain if the new company will be fully independent or absorbed. It must identify opportunities for improvement, optimisation and cost reduction, both within the acquiring organisation and the target company.

This phase also presents the best opportunity for the two entities to maximise synergies, implement upgrades and seamlessly align in terms of operational, technological and cultural aspects.

M&A growth in a post-pandemic world

Market analysts expect the tremendous growth in M&A activities to carry on in 2022, as organisations find and capitalise on growth opportunities in a post-pandemic world. In the United States alone, more than 60% of the executives surveyed by Ernst & Young say they intend to put M&A at the top of their growth strategies, especially as a means to achieve their long-term environmental, social and governance (ESG) and innovation targets.

While experts do not expect 2022 to surpass the USD 5 trillion worth of global M&A deals made in the previous year, they anticipate another year of robust development amidst challenges, such as disruptions in supply chains, resource and labour deficiency, inflation of costs and the threat posed by Covid-19 variants.