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Global challenges hit M&A activity in Middle East, GCC

Mubadala acquires KELIX Bio, a specialty pharmaceutical business focused on manufacturing biopharmaceuticals across emerging markets.
  • Sovereign Wealth Funds emerge as pivotal players, driving economic diversification and strategic cross-border partnerships, says Riccardo Molinari of Bain & Company.
  • With a spotlight on sustainability and strategic growth, 2024 holds optimistic prospects for merger and acquisition activity in the Middle Eastern region, including GCC.

DUBAI — The Middle East and GCC region’s M&A activity fell in 2023, mirroring the global trend. The total M&A market dropped by 15 percent to $3.2 trillion, marking the lowest level in a decade. This decrease can be attributed to various factors such as high interest rates, regulatory scrutiny, and mixed macroeconomic signals, leading dealmakers to become more selective in pursuing transactions.

According to a recent report by Bain & Company, the decline in overall M&A activity in the Middle East and GCC region led to the emergence of several noteworthy trends in specific industries throughout 2023. The collapse of tech M&A had a significant impact on strategic M&A across industries. Specifically, the tech deal volume in the region decreased by 26 percent in the first 10 months of 2023, with the value plummeting by 59 percent, which was more pronounced compared to other major industries.

Despite this decline, notable deals were still being executed, with more than 4,100 transactions completed during the first nine months of the year, including 31 deals valued at over $1 billion. “Despite the challenges faced, 2023 demonstrated that the healthcare and life sciences industry remained resilient in terms of M&A activity. The industry maintained high levels of cash, with approximately $171 billion across pharmaceutical companies,” says Riccardo Molinari, Associate Partner at Bain & Company.

Riccardo Molinari

Moreover, an overwhelming 80 percent of healthcare executives predict that they will engage in as many, if not more, deals in 2024 compared to 2023. This signals the industry’s readiness to prioritize M&A as a strategic growth driver despite the turbulence experienced in 2023.

On the other hand, companies in the energy and natural resources sector exhibited a dual focus on reinforcing core businesses while also promoting a low-carbon agenda through their M&A activities. This balanced approach underscores the industry’s commitment to addressing environmental concerns while ensuring the sustainability and growth of their operations.

Furthermore, the aerospace and defense industry witnessed a series of significant multibillion-dollar deals that had been announced in prior years officially close in 2023. Looking ahead to 2024, the industry is anticipated to enter a new era characterized by a higher interest rate environment. This shift is expected to bring about reduced costs for space access and establish space as a fully contested geopolitical arena. Bain anticipates that portfolio reshaping and lower valuations will act as catalysts for increased M&A activity in the aerospace and defense sector.

“These trends demonstrate that despite the challenges and uncertainties in the broader M&A landscape, specific industries in the Middle East and GCC region have shown resilience and adaptability, positioning themselves for continued M&A activity and strategic growth in the coming year,” Molinari told TRENDS.

Factors driving GCC M&A in 2023 were notably influenced by the transformative role of sovereign wealth funds (SWFs) in reshaping the economic landscape of the Middle East. The M&A Report 2024 underscores the significant impact of SWFs, which have played a pivotal role in steering the region beyond its traditional reliance on oil. Notably, SWFs collectively accounted for a remarkable 86 percent of the total deal value, underscoring their dominant influence in shaping the GCC’s investment landscape.

The increasing involvement of SWFs from the GCC countries presents a significant opportunity for companies pursuing M&A deals in the region. Building relationships with these investors and understanding their investment priorities can provide valuable insights, potential funding, and strategic partnerships for M&A activities

Riccardo Molinari, Associate Partner at Bain & Company

Of particular significance is the surge in investments by SWFs in Asian companies, reflecting a strategic effort to revitalize manufacturing and drive innovation within the Middle East. The report highlights a substantial upsurge of nearly 60 percent in the value of SWF deals with Asia, signaling a growing trend of cross-border investments and strategic partnerships aimed at fostering economic diversification and growth within the region.

According to Molinari, these developments shed light on the growing influence of SWFs as key driving factors behind the M&A activity in the GCC countries, with their strategic investments and partnerships playing a pivotal role in redefining the economic dynamics of the region. Moreover, this underscores the increasing importance of cross-border investments and collaborations, particularly between the GCC and Asian markets, as key drivers of M&A activity and economic transformation in the region.

In addition to the influential role of sovereign wealth funds in shaping the M&A landscape, the report highlights the proactive efforts of the region’s SWFs in decarbonizing their portfolios, signaling a steadfast commitment to sustainable investment practices. This emerging trend is evidenced through a growing emphasis on deals aimed at accelerating the energy transition, particularly in Saudi Arabia and the UAE, as they position themselves as global leaders in clean energy.

Leveraging their expertise in hydrocarbons and their potential advantage in renewables and energy transitions, Saudi Arabia and the UAE are spearheading initiatives to drive the shift towards sustainable energy. Furthermore, this shift towards energy transition is manifesting in M&A activity, with prominent entities such as the Public Investment Fund (PIF) and Mubadala committing to net-zero targets by 2050 and actively investing in green assets.

2024 Outlook

Looking ahead to 2024, there’s optimism surrounding M&A activity in the Middle East and GCC region after the challenges faced in 2023. Molinari highlights that despite the 15 percent decline in the total M&A market to $3.2 trillion, dealmakers encountered obstacles such as high interest rates, regulatory scrutiny, and volatile macroeconomic indicators, leading to a more cautious approach to pursuing deals. A notable challenge was the disparity in valuations, with strategic deal multiples hitting a 15-year low of 10.1 times. Additionally, the expected shift in deal dynamics for 2024 is driven by the transformative role of sovereign wealth funds (SWFs) in reshaping the region’s economic landscape.

The M&A Report 2024 underscores a significant surge of almost 60 percent in the value of SWF deals with Asia during the first three quarters of 2023, indicating a strategic pivot towards increased investments in the region. Moreover, as the region diversifies beyond its traditional reliance on oil and gas, SWFs are guiding economic diversification and resilience. The resurgence in M&A activity in 2024 is anticipated to be fueled by strategic investments and partnerships facilitated by SWFs, contributing to a dynamic and evolving M&A landscape in the Middle East and GCC region.

Prominent entities such as the Public Investment Fund and Mubadala are actively investing in green assets.

Regional M&A Advice for Companies

Molinari stressed that when considering M&A deals in the region, companies should keep several key insights and considerations in mind, especially in light of recent trends and developments, which include:

1.Understand the Regulatory Landscape: Given the recent regulatory changes and increased scrutiny of M&A deals, it’s crucial for companies to thoroughly understand the regulatory requirements and approval processes in the Middle East and GCC countries. Engaging with local legal advisors and regulatory experts can help navigate the complexities and ensure compliance throughout the M&A process.

2.Engage with Sovereign Wealth Funds (SWFs): The increasing involvement of SWFs from the GCC countries presents a significant opportunity for companies pursuing M&A deals in the region. Building relationships with these investors and understanding their investment priorities can provide valuable insights, potential funding, and strategic partnerships for M&A activities.

3.Focus on Energy Transition and ESG Considerations: With the emphasis on accelerating the energy transition and decarbonization, companies should align their M&A strategies with sustainability goals. Understanding the implications of net-zero commitments, evaluating opportunities in decarbonization technologies, and considering ESG factors in deal evaluation can resonate with the evolving investment priorities of regional and international investors.

4.Collaborate with Asian Entities: The trend of Gulf SWFs increasing their exposure to Asia suggests opportunities for cross-border partnerships and collaborations. Companies should explore potential joint ventures and alliances with Gulf-based investors and Asian counterparts to leverage their growing ties to Asia and expand market opportunities.

5.Conduct Comprehensive Due Diligence: Thorough due diligence is essential when pursuing M&A deals in the Middle East and GCC region. This includes a deep understanding of the target company’s operations, financials, legal standing, and market positioning. Given the cultural and business environment differences, local expertise and market knowledge are invaluable in conducting comprehensive due diligence.

6.Adapt to the Local Business Environment: Companies should adapt their strategies to the local business environment, taking into account cultural nuances, business practices, and geopolitical factors. Building strong local partnerships and understanding the nuances of doing business in the region can significantly contribute to the success of M&A endeavors.