Global Arab Network | Downturn deals can still deliver value, 26% UAE businesses eye merger

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Downturn deals can still deliver value, 26% UAE businesses eye merger

Global Arab Network - - Mohamed Tamer

Wednesday, 08 July 2009 16:58

Courageous companies that have completed deals since the collapse of Lehman Brothers are being rewarded with market outperformance of 6.3% compared to their deal-avoiding peers.
According to global professional services firm, Towers Perrin, fears that mergers and acquisitions (M&A) are riskier than before due to valuation difficulties post-Lehman seem to be misplaced.

Analysis published today by the firm concludes that downturn deals can still deliver, rather than destroy, value.

The analysis from Towers Perrin and the UK's Cass Business School finds that companies forging ahead with transactions ('Brave Acquirers') are picking up bargains and seeing better returns than those not doing deals ('Deal Avoiders').

The study analysed 204 deals with a value greater than $100m which completed between 15th September 2008 (when Lehman filed for bankruptcy) and 31st May 2009.

On average, dealmakers showed negative shareholder return of 25.4%, compared to 31.7% negative shareholder return for the rest of the market.

In fact, the more deals done by a company, the better its performance. Repeat acquirers in the same period - of which there were 15 companies completing 32 deals - outperformed the MSCI World Index by 16.7%. Regionally, companies acquiring in the US experienced the best market performance, with a 10.0% better return relative to the global market.

Crispin Marriott, Towers Perrin's Middle East Managing Director said: 'The collapse of Lehman Brothers marked a watershed in international market activity and Towers Perrin wanted to examine how such a traumatic event may have conditioned M&A behaviour. From our perspective, many companies are dithering over deals, nervous to commit in the post-Lehman world where the line of sight of their investment has shortened. This analysis proves that fortune favours the brave.'

Results of Towers Perrin's latest survey of business leaders in the UAE shed further interesting light on perceptions of likely M&A activity in the region, with 26% seeing their business being involved in a merger or acquisition, and of these, 69% anticipate that happening in the next 12 months.

Marriott comments, 'Despite the results of the UAE survey and much speculation in the media, actual M&A activity on the ground to date in the GCC has perhaps been slower than many predicted, although that may now be changing. Given the results of this latest global research showing that confident companies are acting quickly to capitalise on reduced competition for good assets at better prices the question must be asked; Are local firms missing a trick,'

Interestingly, the UAE survey data show that only 10% of business leaders see substantial discount to assets being a main driving motive of local or regional companies decision to merge or acquire. 54% saw the main motive as being to develop and diversify core competencies and over a quarter, 28% did not know. The picture was much more mixed in terms of perceptions of the M&A regulatory system. 28% anticipate a relaxation in the regulatory system pertaining to M&A, as a result of the global crisis, 34% anticipate no change and the remainder are unsure.

There are multiple possible reasons why M&A activity in the Gulf has yet to materialise to the extent some have predicted. One of which may be concerns over ability to successfully do the deal. Companies wanting to sustain market outperformance during and beyond the downturn, through M&A need a robust execution capability. Indeed, firms can move swiftly but still need to be diligent on the due diligence process, and ensure that they execute the integration effectively and flawlessly.

'Successful companies actively use the quiet period between deals to build M&A capabilities and ensure deal teams are ready for the next transaction,' comments Marriott.
Other findings:
In addition to the general market outperformance data, the Global analysis found:
· Companies acquiring within their own country borders outperformed the market by 7.7% - whereas acquisitions across borders only outperformed by 4.0%.
· Dealmakers in financial services performed only 0.4% better than the global market, yet outperformed their peer group by 14.0%.
· Healthcare was the best-performing industry, with a 13.8% better return. The technology sector outperformed by 9.3%, and energy by 7.3%.

Crispin Marriott commented, 'Brave Acquirers' demonstrate how smart deal-making can be part of a well-financed company's armoury during the months of uncertainty ahead. Translating the global results into this region there is a clear message, Companies that have the foresight to look beyond the immediate downturn and who become good at deals are likely to reap significant rewards by acting sooner rather than later. Provided they have put in place the systems and processes in place to move quickly for the right purchase.'

To maximise return on investment, Towers Perrin recommends that downturn dealmakers should:
- Continue to be diligent about due diligence: jumping into a transaction because the price appears low remains irresponsible and can be hugely damaging, but effective due diligence can be accelerated.
- Focus on integration execution: grab synergies fast, and ensure you focus on areas of critical value: leadership, culture, total rewards, communications, workforce deployment and selection & staffing.
- Be prepared: use the relative lull in M&A activity to tool and train staff for acquisition, for example, is your HR department 'M&A ready?' being prepared pays off in speed and quality of execution.

Global Arab Network

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Last Updated on Wednesday, 08 July 2009 23:41

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