Tensions have been growing in the Middle East, as global geopolitics play out across the region. But, unlike other parts of the world, dealmakers in the Middle East still began 2023 with a sense of optimism. With encouraging economic growth forecasts for the region and the impetus of political leadership intent on diversifying away from dependence on fossil fuels, there was good reason to look forward to a strong year of M&A activity. The outturn for the year, however, has proved disappointing. M&A in the region has been unable to escape the impacts of global economic headwinds, as well as geopolitical tension and volatility in the oil price during the second half of the year.

Over the first three quarters of the year, there were 367 M&A transactions worth $28.8bn involving Middle Eastern targets, according to data from White & Case. This is down on the total for 2022 of 752 deals worth $71.5bn – way down on the peak year of 2021, which saw more than $131bn worth of M&A.

While the Middle East presents promising opportunities for M&A activity, it is important to acknowledge the connection to the global landscape, says Zubin Chiba, corporate finance leader at PwC Middle East. “There has been a focus on valuations, cash generation and other key return metrics within the deals landscape.”

Salmaan Khawaja, who heads up the financial advisory services team at Grant Thornton in the United Arab Emirates (UAE), is upbeat about the prospects for the region. “We anticipate a positive outlook over the long term from the level of aspiration in the region,” he says. “For example, look at the Vision 2030 strategy of the Saudi Arabian government to diversify the economy and expand new industries, as well as the Abu Dhabi Economic Vision and Dubai’s D33 economic agenda.”

Certainly, Middle Eastern countries such as Saudi Arabia and the UAE are making their intent clear. The UAE’s hosting of the COP28 climate change conference in December may have raised eyebrows, but it underlined the fact that Middle Eastern leaders recognise the imperative to reorient their economies away from oil. M&A is likely to play a huge part in that shift.

Modernising through M&A

Indeed, while deals in the region are taking place in a broad spread of sectors, they are very often linked to the drive to diversify and modernise the region, says Rajiv Maloo, a partner at KPMG in the Lower Gulf: “We’re seeing many deals that have a technology element to them in one way or another. Similarly, the transition to cleaner sources of energy is a theme across the region, with governments making a conscious decision to be at the centre of that debate.”

Activity in other sectors reflects similar concerns. “Food security is a consideration across the Middle East, so we are seeing activity in the food space across the entire value chain,” Maloo adds. “And there is continued interest in the healthcare sector, not only in terms of expanding hospital network and healthcare provision, but also in the pharmaceutical space.”

The region’s demographics and geography also play into M&A activity, points out Chiba, with a young, affluent population seeking a greater choice of consumer goods. “Consumer-focused businesses are in demand in areas such as leisure and consumer goods, but also in healthcare and education,” Chiba says. “Transport and logistics is also an active area, as the Middle East works to improve its global connectivity.”

Diversified approach

Such activity is driven by multiple actors. First, the region is home to a significant number of sovereign wealth funds and government-related entities. These include the Abu Dhabi Investment Authority (ADIA), Mubadala in the UAE and the Public Investment Fund in Saudi Arabia.

These bodies have deep pockets, courtesy of oil revenues, and pursue M&A opportunities with the policymaking objectives of their countries. “They are focused on economic diversification, either through direct investment or through funding for subsidiaries and other entities,” says Chiba. In the current environment, he points out, sovereign wealth funds are in a strong position to capitalise on opportunities in the M&A market, driven by a long-term, strategic approach to transactions.

Indeed, opportunities such as these are not limited to the Middle East. White & Case’s data suggests that outbound M&A activity from the region has been much more resilient this year, boosted by sovereign wealth funds pursuing international deals.

There is also a second group of M&A participants that is more of a feature in the Middle East than in other regions, that of wealthy families involved in many deals, either directly or through family office structures.

Generational shift

A major generational shift of wealth looks set to strengthen this trend. Research from private bank Julius Baer suggests that over the next decade as much as $1trn of assets will move from older family members to younger successors in the Middle East. “Families have been associated with a more parochial approach to dealmaking, but the younger generation appears to be more willing to let go of businesses that no longer fit and to invest in new areas,” Chiba adds.

Last July, Canadian investment group Brookfield Asset Management announced it was leading a consortium to take over the London-listed Middle Eastern credit card processor Network International in a £2.2bn deal. First Abu Dhabi Bank is part of the consortium. Before listing in 2019, the company was backed by General Atlantic and Warburg Pincus.

Meanwhile, Middle Eastern corporations continue to play an active role in M&A markets too, often looking to deals to move their businesses in new directions, particularly when it comes to acquiring new technologies. “Middle Eastern corporations have seen positive gains from the region’s robust economic performance, resulting in ample liquidity on their balance sheets,” Chiba explains.

“Private equity interest in the Middle East has been growing, through both equity and credit funds, but it’s a relatively select group of firms doing most of the deals,” he says.

This is potentially problematic for the growth of mid-market businesses in the region. For many deals, sovereign wealth funds aren’t a viable alternative, as they’re focused on long-term national strategic objectives. Private equity is the missing piece of the jigsaw in the region. 

Multiple questions

Some mid-market companies are still working through a steep learning curve, suggests Nick Beer, CFO of UAE-based business services group Transguard, one corporate with an active M&A strategy. With less experience of working with investors and other partners, these firms may not have access to seasoned negotiators and dealmakers. 

“Looking outside the region for investment can be a shock to the system when the market questions your valuations and forecasts, something these business leaders are not accustomed to,” he says. “Middle Eastern businesses are less likely to move towards a sale through an auction process, advisers in the region say. They would rather agree a price upfront with an individual entity than test their valuation with an open-market competition.”

Beer also offers advice for those about to embark on an M&A in the region: “Businesses in the Middle East are steadily becoming more aware of the quality of documentation and diligence required and with that comes a deeper familiarity with the level of granular detail sought by buyers.”

However, Grant Thornton’s Khawaja believes that this is changing. “The sophistication is growing, partly because the quality of advice on hand in the region is very high, with a wide range of corporate finance advisers, consultants and lawyers available for the size of the market,” he says.

“It’s the pace of the process where those more used to Western markets may sometimes notice a difference,” Khawaja adds, “particularly for deals involving state-linked entities that may have more elaborate structures and internal protocols to work through. Valuation can also be difficult to corroborate because there are fewer listed companies across the region in general and comparisons are therefore harder to make.”

Much to envy

Still, these technical and practical issues can be overcome, particularly with access to good-quality advice. Dealmakers in other regions, where M&A activity has slumped far more dramatically in 2023, could be forgiven for envying their Middle Eastern counterparts’ more mundane challenges. M&A activity in Europe, for example, fell by 55% in value terms during the first half of the year.

KPMG’s Maloo believes the region will continue to show its resilience. “The Middle East is a rare bright spot in the global M&A market,” he says. “On the ground, we’re seeing very little evidence of a slowdown, particularly in markets such as the UAE and Saudi Arabia.”