The better the question. The better the answer. The better the world works. У вас есть вопрос? У нас есть ответ. Решая сложные задачи бизнеса, мы улучшаем мир. У вас є запитання? У нас є відповідь. Вирішуючи складні завдання бізнесу, ми змінюємо світ на краще. Meilleure la question, meilleure la réponse. Pour un monde meilleur. 問題越好。答案越好。商業世界越美好。 问题越好。答案越好。商业世界越美好。

Macroeconomic uncertainty has MENA executives hitting the pause button on M&A

Global Capital Confidence Barometer | Middle East and North Africa (MENA) | 15th edition

As the current edition of the Capital Confidence Barometer reflects, countries in the Middle East and North Africa (MENA) were at a low ebb when EY conducted this survey. Oil prices were lower, and there was a great deal of economic uncertainty as governments across the region were developing strategic plans to address the financial shortfall created by the sustained drop in oil revenues, but had yet to announce their intentions.

Despite these circumstances, 59% of MENA executives see the global economy as stable to improving. Those who view the economy as declining dropped five percentage points to 41%. That said, there are variances by country. Saudi executives express the least enthusiasm, with 57% seeing the state of the global economy in decline. The United Arab Emirates (UAE), on the other hand, is far more optimistic, with 56% perceiving the global economy as stable. Half of Qatar respondents view the global economy as stable, while Egypt is split evenly among those seeing the economy as improving, stable or declining.

At the local level, MENA companies are far more optimistic, with 74% perceiving the economy to be stable to improving. In contrast to their global views, 40% of Saudi executives see the local economy as improving, up 30 percentage points from six months ago. This reflects the Saudi Government’s efforts to implement reforms, such as Vision 2030, to help generate economic opportunities and growth.

Although not quite as optimistic, 28% of UAE respondents see their local economy as improving, up from 12% in April 2016. The views from Qatar and Egypt are more tempered: an overwhelming majority of executives see the local economy as stable and stable to declining in Qatar.

At both global and local levels, market fundamentals support a relatively stable outlook across the region. However, these views are not translating into robust dealmaking as M&A activity has dropped significantly from six months ago.

Full pipelines but fewer deals

Unlike global respondents, who see a rebound in deal activity from six months ago, interest from MENA executives is on the wane, with 21% expecting their company to pursue a merger or acquisition in the next year. Qatar and Egypt are particularly quiet on the M&A front. In fact, Qatar companies don’t have any deal intentions in the next 12 months. The UAE is feeling most optimistic, with 37% looking to make a deal.

A drop in deal intentions may partly be a result of the geopolitical instability and high volatility in currencies and commodities that executives cite as posing the greatest economic risk to their M&A strategy, or the slowdown in global trade flows that all countries in the region are experiencing. Although deal fundamentals remain relatively stable at local levels, with more respondents feeling better about the number of acquisitions, they are less optimistic overall about the quality of acquisition opportunities and the likelihood of closing, largely as a result of macroeconomic issues.

However, that has not stopped MENA companies from filling their pipelines in the hope of movement down the road. Sixty-seven percent of MENA respondents indicate that they have five or more deals in the pipeline, versus 49% of global respondents. For 40% of MENA executives, their pipeline numbers are expected to increase in the next 12 months.

Although 32% of MENA executives suggest that new product or service innovation is the key strategic driver for pursuing acquisitions outside their own sector, the objectives of each country differ slightly. In Saudi Arabia, for example, half the executives surveyed say that access to new materials or technology was their number one priority. For all countries, their second most important driver is acquiring talent to deal with the disruption new technologies and digitalization bring.

Organic and inorganic routes

Where product innovation is seen as causing the most disruption to MENA companies’ core business, industry regulations are also creating cause for concern. Across the board, MENA executives ranked advances in technology and digitalization as the second-most disruptive issue for the core business in the next 12 months.

To address these issues, while continuing to focus on higher growth, MENA companies are looking at both organic and inorganic opportunities. Whereas a majority (61%) of UAE executives are focusing on organic growth, other countries in the region are more evenly split between organic opportunities and the potential to buy, or form alliances with, other companies to achieve their growth objectives.

A wait-and-see approach

MENA companies are feeling more optimistic about the local economy and deal opportunities, and they have a wealth of M&A targets in their pipelines. But they are unwilling to vigorously pursue dealmaking until they see the impact of governmental reforms and whether oil prices rebound.

In the next 12 months, many companies will have capital allocation decisions to make. Some face tough choices as liquidity remains tight. However, companies with cash on hand may be able to take advantage of currency volatility and pricing advantages to complete some of the deals in the pipeline.

Given the commitment that governments have made to economic stabilization and reform, and an expected rebound in oil prices, we expect to see economic confidence and deal intentions improve in 2017.