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MENA execs feel positive about M&A market

Global Capital Confidence Barometer: Middle East and North Africa (MENA) | 17th edition

M&A intentions remain robust amid digital disruption, but uncertainty creates another period of watchful waiting

Our 17th Global Capital Confidence Barometer shows Middle East and North Africa (MENA) executives continue to feel confident about the M&A market, with a record 65% of respondents indicating their intention to pursue deals actively in the next 12 months.

Watchful waiting in the short term, continued confidence in the medium term

This edition’s numbers do not capture the essence of the “watchful waiting” MENA companies are adopting in light of recent events within the region. Yet, with recent oil prices, a slow-growth environment and the diversification agendas of many MENA countries still more in the planning than execution stages, MENA executives understand that they need to “buy” versus “build” to remain competitive.

Results show that almost every country in the region identifies the need to grow market share as the number one strategic driver for pursuing acquisitions. All MENA respondents also recognize that M&A can provide the fastest route to future-proofing their businesses amid a landscape of disruption and rapid technological change. This position is further supported by the fact that 62% of MENA companies expect the local M&A market to further improve over the next 12 months.

Digital disruption drives dealmaking

MENA executives are feeling pressure as current business models undergo change, with nearly one-third citing the impact of digital technology and transformation as the primary force propelling changing customer behaviors and heightening threats from digitally enabled competitors and start-ups.

The Kingdom of Saudi Arabia (KSA) appears to be experiencing the impact of digital technology more acutely than other countries in the region, while Egypt and Qatar cite changing customer behaviors as more disruptive than the digital technology itself.

These disruptive influences are compelling MENA companies to be more responsive in their portfolio reviews, with 69% saying they review their portfolios every six months, and more than half of those (37%) reviewing them every quarter or more.

Disruption is also driving convergence among industries. Technology seems to be the gateway to sector convergence, but is often not the final destination. A regional real estate giant, for example, is seeking to invest in a digital fashion portal that would allow customers to order online, and collect their purchase at a local retail outlet.

Despite these efforts, only half of MENA companies say that they are being proactive in addressing the impact of digital technology and transformation on their business model and changing customer behaviors (49% and 51% respectively) versus 65% and 54% of global respondents. The KSA appears to be the most reactive to the digital disruption it faces at 67%, while Egypt seems to be the most proactive at 65%.

Private equity is still a player, but the impact is more muted

In terms of competition for assets, although private equity remains a player in the region, its impact is more muted than in previous years. A significant majority of the capital private equity firms raised four or five years ago has been deployed in the market.

Private equity’s buying spree during this time pushed valuations higher. Some sellers have been waiting for those good times to return. With private equity becoming net sellers versus net buyers, we expect valuations to remain at sensible levels.

Corporate venture capital gains increasing attention

Although corporate venture capital is something of a nascent asset class, several MENA executives see it as a promising route to enhance their technology and innovation position, with 60% engaged in corporate venture capital investment and another 23% considering it. Of those investing, 91% are planning to allocate as much as 15% of their planned acquisition capital toward corporate venture capital-type investments over the next three years, with the majority (48%) allocating 6% to 10%. The main drivers for corporate venture capital investments are accessing new capabilities and technologies (41%) and gaining a faster route to market (32%).

Improving economic outlook boosts organic growth, but M&A is still vital

As we look ahead, rising confidence in the global and local economies underpins a positive outlook for M&A, with 70% and 67% of MENA respondents respectively seeing economic growth improving. Corporate and capital market indicators support this outlook, with 63% of MENA executives expressing positive sentiments around corporate earnings (up from 18% a year ago) and 53% feeling more optimistic about credit availability.

This economic confidence, combined with a climate of volatility, will boost organic growth over the next 12 months, with 69% of MENA executives indicating that they are focusing on existing products and services (up 15% from six months ago). M&A will also remain a vital component of MENA companies’ growth strategy in the foreseeable future, as they continue to take advantage of low interest rates to finance acquisitions, which will provide a competitive edge and continue to position them for success.