As the fallout of the current financial crisis spreads, the markets are being subjected to the volatile and uncertain environment, and markets have entered a vicious cycle of asset deleveraging, price declines, and investor redemptions. Credit spreads spiked to distressed levels, and major equity indices dropped. As a result, merger and acquisition (M&A) activities have grown significantly around the world over the last two decades. Major factors underlying this process are attributed to emergence of globalization, low-cost funding and current financial turmoil - hence the need to create large entities to be able to compete for seeking out growth and profits. Added to them are the increase in capital flows across national boundaries due to economic reform programs and market liberalization in developing countries. Another key factor which spurred growing M&A is the increased globalization of investment seeking higher rates of return and the opportunity to diversify risk, and many businesses recognize the uncompromising demand to venture overseas, or within their region. In the latest study on M&A activities prepared by the Investment Research & Advisory Department of Al Rajhi Financial Services Co, the bank said “we expect to see a significant increase in the volume of M&A deals, especially the mid-market deals, by GCC firms over the next few years. We expect the rationale for acquisitions based on market access, diversification, and access to technology to strengthen. In our view, firms with cost-advantaged feedstocks and concentrated commodity portfolios should look to use the strong cash flow generation from their basic operations businesses to grow strongly.” The outlook for M&A in GCC region in 2009 is flourishing as big investment choices will appear this year when the GCC markets will recover from last year's tumbles. These are sectors with “at least a shot” at increasing earnings or posting more modest declines. “Against this backdrop, we recommend investors a defensive plays or scenarios, such as investing in namely stable companies within the consumer staples and healthcare sectors as among the safest ways. But many are just sitting on the sidelines until a rebound starts to take shape,” the study said. The first quarter of 2009 will be a good time to observe and see if the market action reflects fundamentals rather than politics that will reflect in the market's recent tendency to bypass economic data and corporate earnings reports. On the other hand, the positive side of the hammering equities market in 2008 has impacted stocks at large, leaving the shares of many companies drastically undervalued. The falling price of crude and other commodities should also translate into reduced costs and better margins for providers of staples that investors have to buy, it pointed out. In the mid-market, “we expect tht the most-hit industries and sectors affected strongly by global credit crunch are the financials, petrochemicals, automotive industry, maritime shipping & transportation, real estate, materials and communities.” On the other hand, there are defensive industries which are not affected by the global crunch because these industries depend on local demand such as telecoms, pharmaceutical and drugs, insurance and processed food and agricultural, retails and suppliers, the study said. Apart from the ample opportunities for M&A, some sectors are especially attractive because of their bargain prices. These are promising industries for M&A activity. The study said a number of business restructuring announcement has increased. “The signs are all around us such as excess leverage, operating losses, weak management, and strategies or operation do not built for a downturn market,” it added. M&A also raised the need for establishing a bond market in the GCC countries, it noted. Trend has been facilitated by the rise of Sukuk as a vehicle to this end. Good rating of GCC companies allowed them to issue traditional bonds and Sukuk. Some industries in the region, like the example of banking and telecoms, are highly fragmented, hence the situation is ripe for a consolidation, the study indicated. M&A would also promote interrelation among GCC stock markets and integration of these markets with international markets. The study said a disturbance in one market may spill over to other markets, as happened in the crash of 1987. The exposure of GCC's stock markets to the international events and disputes might widen as of most merger and acquisition activities are outbound of the region. If markets move in parallel, the gain from diversification will disappear as these markets provide similar returns over time. M&A deals do have their imprints on the local bourses, it further said. The effect of the M&A has been multifaceted through global reach and expertise, market depth, consolidation and scale, bond market development and spillover effect. GCC governments and companies are investing for long term and are looking out for companies and assets that would provide sustainable solutions in the form of expertise, technology, and research and development. In the last oil boom, the study pointed out, the GCC companies and governments were content buying stakes in Western companies listed abroad. In this round, they are looking for the investments which would add value to their economies and markets. The governments are trying to enhance the depth of local markets by acquiring the overseas assets and list them on local bourses. Moreover, the governments ask leading regional and global companies to be listed on their markets. “Such companies wouldn't agree unless they see well-regulated and capital rich markets exist in the region. In addition to providing greater depth to the local markets, the same also provides the local investors an opportunity to invest in global companies.” The last few years witnessed a steady increase in number of M&A deals in the Gulf countries, while the value of deals jumped sharply by more than two thousand percent to more than $101 billion in 2007 from $4.17 billion in 2004. The value of M&A transactions in GCC region were deemed to have reached about $54 billion by the end of 2008. There is a spurt in M&A activity in last two years because of a few large deals in 2007 such as SABIC acquisition of GE Plastic and Q-Tel of Watania Telecom. With respect to sector of the deal, most M&A activities take place in banking and finance due to the restructuring of the financial system, including emergence of insurance and security business sectors. For example, “we have seen few M&A and joint ventures deals in the financial services sector of Saudi Arabia,” the study noted. Furthermore, industrials, telecom and logistics are other favorite sectors. Liberalizing the telecom sector around the world led large GCC telecom companies to operate in other MENA and African countries where there is a potential in the sector with low penetration rate and high average revenue per user (APRU). The GCC region dominates more than 44 percent of the top acquiring countries in the Middle East during 2008. UAE is a hub for M&A in the region with more than 21 percent of the deals directed through the country, which could be attributed to large capital flow and existence of well-structured financial institutions. Kuwait is a distant second, while Bahrain, Saudi Arabia, Qatar, and Oman follow. The total number of M&A deals with GCC participation in 2008 were about 418 transactions with a total value of $53.7 trillion. This represents 1.1 percent share in number of deals 2008 and 1.8 percent share in value of deals 2008 globally. In comparison to 2007, number of deals increased by 31 percent, value of deals decreased by 47 percent. __
