How dealmakers in Middle East are enhancing M&A strategies

In a world gripped by economic turbulence and uncertainty, the GCC has managed to defy the global trend of reduced M&A activity over the last two years. The GCC’s outlook for the next 12 months remains cautiously optimistic, driven by a confluence of factors that continue to make it an attractive hub for deal-making.

Growth sentiment: cautiously optimistic

A key driver of this cautious optimism is the growing appetite for expansion among government-linked groups in the region. These entities are not only looking to diversify their portfolios but are also actively seeking inbound investment partnerships, and promoting private sector participation, which, in turn, is boosting investor confidence.

While the pace of M&A activity may have slowed down in 2023 compared to the rapid growth of 2022, the GCC remains resilient, thanks in part to higher oil prices. This financial stability provides the means for cross-border M&A deals, enabling businesses to explore both domestic and cross-border opportunities in and from the region.

Another driver is the push for economic diversification which remains a strategic priority, with digital enablement and the technology sector playing a central role.

The UAE is leading this charge, benefiting from strong demographics, competitive GDP per capita, and a culture of entrepreneurship, particularly in the SME sector. One significant factor contributing to the UAE’s resilience is the leadership’s commitment to a long-term strategy which, unlike many of its counterparts in the West, is not influenced by short-term political cycles.

This sentiment of longevity has allowed the UAE to respond proactively to global economic challenges and focus on building a stable economic and regulatory framework, positioning itself as a stable and reliable partner for investors and businesses.

Coinciding with this era of economic resilience in the region has been the maturity of the Middle East M&A playbook. Below are a handful of tools that are being used more regularly on M&A transactions in and from the region.

M&A insurance: a capital efficiency tool

Dealmakers in the region are increasingly transposing insurance and related instruments into an M&A context to enable transactions that would otherwise falter and to facilitate corporate restructurings, often creating shareholder value in the process.

Dealmakers and their advisers, particularly in the UAE and increasingly in Saudi Arabia, now routinely include insurance on their agenda just as much as the traditional corporate risk manager, albeit with a different goal in mind.

The most common of these tools is warranty & indemnity (W&I) insurance, which has been available in the region for nearly a decade.

In its infancy, W&I insurance was viewed as a solution for the M&A seller, allowing it to insure its liabilities relating to the warranties and tax indemnity provided to the buyer in the sale and purchase agreement. For much of the last decade, only a handful of dealmakers in the Middle East were aware of the product’s existence and the majority of those who were found it to be clunky in its application and often commercially unviable given the cost.

Much has changed over the last 2 years and there has been a steady uptick in the use of W&I insurance on transactions in and from the Middle East. We’re seeing the start of a snowball effect that is primarily a result of three elements finally fusing.

Firstly, the increased supply of specialist insurance capital flooding into the region has resulted in a drop in cost. Secondly, there’s been a noticeable change in perception within the Middle East M&A community with dealmakers now beginning to appreciate that the value of the product can be realised immediately if it’s used effectively as a tool in deal negotiations (unlike traditional insurance products which typically only pay off if and when things go wrong).

Finally, the process has become more streamlined as a result of increased awareness and familiarity.

Sovereign, private equity and corporate dealmakers, together with their advisers, are routinely seeing the benefits of structuring a W&I solution on transactions both within and outbound from the region.

From a seller’s perspective, the ability to limit the liability to a nominal amount can be particularly relevant for an exit as well as structuring deals where the seller retains an interest in the business following completion, to ringfence the relationship between the parties following completion of the deal. From a buyer’s perspective, bridging the gap and having comfort in the knowledge that there is protection from a credit-worthy institution is often a key driver.

W&I insurance may not cover known matters, such as items identified in due diligence or disclosure processes. In these cases, tax liability insurance comes to the rescue, reducing or eliminating exposure to risks related to a tax authority’s challenge of expected tax treatment in transactions.

This solution has witnessed increased adoption and flexibility, particularly on outbound transactions from the region, making it a particularly useful tool for managing known tax risks in both M&A transactions and corporate reorganizations.

With the introduction of VAT and corporate tax in the UAE and Saudi Arabia in recent years, I expect that the use and relevance of tax liability insurance will become more prevalent in domestic transactions and restructurings in the coming year.

A focus on cyber and intellectual property: an increasingly digital world.

In 1985, 30 per cent of S&P 500 value was intangible assets whereas today that figure has grown to nearly 90 per cent.

The Middle East is embracing the digital revolution with large parts of the region increasingly focused on economic diversification strategies to reduce its reliance on oil and gas. As a result, technological advancements in the Middle East are taking place at record speeds.

Even sectors such as manufacturing that traditionally lagged in implementing the latest technology have embraced the digital revolution. But with that, comes both increased risk and opportunity.

The region is particularly vulnerable to cyberattacks on critical infrastructure, such as oil and gas fields, power plants, ports and airports and the data shows that the cost of a cyber incident across the Middle East is significantly greater than the global average.

As a result, a comprehensive assessment of an M&A target’s cybersecurity readiness has become increasingly important. Analysing a target’s footprint within the hacking community, investment in security defences, and inherent exposure to cyber threats can provide valuable insights. These cybersecurity assessments have often allowed investors to factor in cyber risk in their valuation and financial modelling, supporting deal certainty and post-close risk management through insurance.

Separately, in an era that is dominated by intangible assets, IP management and protection have gained prominence. For investors and acquirers in the region, IP analytics can play a vital role in assessing the quality, uniqueness, and potential revenue generation of a target’s IP.

An in-depth analysis assists in evaluating the target’s competitive position and overall IP management maturity, offering a distinct perspective beyond traditional legal IP due diligence.

We expect there to be an increased focus on cyber and IP aspects of M&A transactions over the next 12 months.

The GCC’s M&A activity has defied global trends, and the outlook for the next 12 months remains cautiously optimistic. The region’s commitment to diversification, and technological transformation coupled with resilience to global economic headwinds and a focus on long-term strategy over short-term politics, continues to attract investors and drive deal-making.

As businesses in the GCC navigate economic uncertainty and volatile financial markets, M&A insurance tools and specialist due diligence are becoming increasingly adopted to enhance M&A strategies.

Omer Mahdi is the head of transaction solutions, Middle East at AoN

Read: Navigating M&A transactions, restructurings in the face of UAE’s corporate tax