Opinion: Will M&A transactions continue to surge in the Middle East?

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Driven by a desire to diversify local economies to reduce dependence on oil revenues and foster a more business-friendly environment, the Middle East region has emerged as an attractive investment hotspot amidst struggles elsewhere, fuelling domestic entrepreneurship and a resurgent economic landscape.

New sectors set to fuel M&A growth in Middle East

The Middle East region is at the centre of a deal-making boom as the post-pandemic economic recovery takes shape. According to data, M&A deals in the region increased by 13 per cent in 2022, reaching 754 deals worth a staggering $82.5bn. The regional M&A surge follows progressive economic reforms in recent years.

This economic diversification drive has also inspired new industries and emerging sectors, further fuelling the deal-making marketplace.

While traditional sectors such as energy still dominate regional economies, technology, renewable energy, e-commerce, and tourism are the new growth drivers and targets of heightened investor interest. These industries promise tremendous growth potential and local and international investors are keen to capitalise on the region’s emerging opportunities.

To leverage these new opportunities, regional organisations are increasingly pursuing strategic partnerships and acquisitions to expand their reach and gain a competitive edge in a rapidly evolving market landscape.

Conducive environment being nurtured by GCC governments

There has also been a notable shift towards greater regional cooperation in recent years, recognising the benefits of collaboration and integration, both economically and politically. This growing sense of unity has, in turn, created a more conducive environment for cross-border M&A deals.

Companies are more inclined to explore opportunities beyond their borders, seeking acquisitions in neighbouring markets to expand their customer base, access new distribution networks, and capitalise on economies of scale. Mini-regional integration efforts like the GCC facilitating smoother M&A transactions by harmonising regulations and fostering cross-border investments will go a long way towards establishing this region as a thriving M&A destination.

Another M&A driver is a region-wide transition to clean energy and low-carbon industries. The region has abundant capacity for renewable energy resources, such as solar and wind. The transition to clean energy is necessary to mitigate climate change and is a strategic national priority to boost energy security, reduce fiscal pressure and create jobs.

The green sector has seen a surge in M&A deals in recent years, especially in the energy and utilities sectors, accounting for 10 per cent of all M&A transactions in 2021.

Saudi Arabia spearheads M&A activity in the region

Wide-ranging reforms at multiple economic, social, and cultural levels offer significant growth and investment opportunities within the kingdom.

The initiatives under Vision 2030 to accelerate the diversification into non-oil sectors offer lucrative expansion opportunities. The Saudi Sovereign Public Investment Fund (PIF) has spearheaded notable domestic and cross-border transactions, such as acquiring stakes in Kingdom Holding Company, Saudi Tabreed, and Tamimi Markets, among others. Saudi Arabia’s IPO market doubled in size in 2022, raising nearly $10bn.

The future of M&A in the region

Technology is a force multiplier in the M&A space. The rise of 4IR technologies, such as AI, significantly streamlines the process, introducing new efficiencies and simplifying a complex and dragged-out process. For example, due diligence was handled manually in the past, where reviewers sifted through mountains of documents for relevant contracts, accounts, and people. Today, this data can be pulled through AI software to identify and capture all relevant information, condensing weeks of work into a few hours.

While opportunities abound, M&A also poses challenges for buyers and sellers alike, which could result in monopolies, regulatory hurdles, cultural differences, or environmental issues, further undermining performance and social welfare. Moreover, M&A can also have distributional effects on stakeholders, such as workers, consumers, suppliers, or competitors.

Overcoming these challenges requires guidance and expertise to help navigate every step of the process. This is where professional consulting companies come in – they assist clients in making the most of the expected synergies from a merger or acquisition, managing the complex process of integrating or separating businesses, and optimising the performance of the remaining or new entity.

There’s also the need for more regulatory reforms to level the playing field further. Policymakers and regulators should ensure that laws are conducive to cross-border acquisitions to boost economic recovery and development. This requires creating a favourable business environment that fosters fair competition, transparency, governance, and market contestability. It also calls for strengthening institutional capacity to monitor and evaluate the impacts of M&A on various dimensions of economic performance and social welfare.

M&A is a powerful tool for companies in the Middle East region to grow and transform their businesses. With a proper framework, regional companies can leverage M&A to become globally competitive and raise the standards of business practices in the region.

The write is the managing director of Transaction Services at Protiviti Middle East Member Firm