While the global M&A scene chills, the Middle East deals upwards

The year 2022 was a tale of two halves for the international mergers & acquisitions (M&A) scene. But as global dealmaking activity cooled down significantly in the second half of the year, the Middle East charged ahead, according to Bain & Company’s latest industry report.

After a blockbuster 2021 for mergers & acquisitions, the first five months of 2022 reflected continued strong dealmaking activity on the worldwide stage.

But towards the middle of the year, following several interest rate hikes by central banks in large economies, combined with heightened macroeconomic uncertainty, the deal market entered a cooler phase, with many large deals going on pause while smaller deals slowed.

Overall, global deal activity stalled at $3.8 trillion in 2022, down from $5.9 trillion the year previous. Deal volume fell as well, by 12%. The Middle East, however, managed to buck the downwards trend.

According to Bain & Company’s estimates, M&A activity in the region in fact rose by about 39% in 2022, fueled in large part by government-owned sovereign wealth funds. For example, Saudi Arabia’s state-owned Public Investment Fund invested $1.3 billion in four Egyptian companies in August 2022, including Abu Qir Fertilizers and Alexandria Container and Cargo Handling.

Combined, sovereign wealth funds and corporations represent 84% of all Middle East deal value. “But sovereign wealth funds are where most of the action is,” stated Grégory Garnier, a deals-focused senior partner at Bain in the report’s chapter dedicated to the Middle East.

Headquartered in the US, Bain & Company is a strategic consulting firm with a long heritage in mergers & acquisitions. The firm’s Global M&A Report has been tracking in-depth sector dynamics for over a decade, with spin-off reports created for regions, deal buyer segments (for example: private equity) and sectors (for example: healthcare).

Sovereign wealth funds

According to the firm’s 2023 analysis, sovereign wealth funds are buying up with five objectives in mind, including the desire to build local champions, the aim to invest in strategic industries of the future, and market entry into new verticals, as part of economic diversification strategies.

Then there is also the frank objective to “increase visibility on the global stage”, which in some cases comes down to closing prestigious investments. Take Qatar Investment Authority’s acquisition of the St. Regis Hotels in New York, or its investment in luxury car (and engine builder) Rolls-Royce.

In the case of corporate deals, companies are buying companies or forming partnerships to consolidate local markets in strategic sectors, such as the deal between Saudi British Bank and HSBC Saudi Arabia or the Etihad-Air Arabia joint venture.

In another approach, regional companies are expanding internationally through cross-border M&A or through overseas investments. For example, First Abu Dhabi Bank merged its Egyptian operations with Bank Audi Egypt, creating one of Egypt’s largest banks.

A much smaller segment relates to corporate venturing, when corporates invest in start-ups or scale-ups as a means of bolstering innovation, or rapidly upskilling their talent base.

Meanwhile, while the private equity scene accounts for a major chunk of global deals activity, in the Middle East, their role is “limited in the region and has actually dropped significantly in 2022.”

Further reading: Global private equity industry preparing for choppy waters ahead.

Outlook

Looking ahead, Bain & Company’s experts believe that also in 2023, the Middle East will demonstrate relatively higher deal activity than other regions. “These are good times for the local economies. Buoyed by strong economies, and ambitious government-backed mandates to push to expand beyond hydrocarbons as well as globalize its companies, the Middle East is well positioned to rely on M&A to further advance the region’s long-term agenda,” said the report’s authors.

The sentiment echoes a recent report from EY, which suggested that two thirds of Middle East CEOs aim to pursue M&A as part of their strategic agenda and roadmap.