Dealmakers hungry for action

Mergers and acquisitions activity is rising globally, but the Middle East will be playing catch-up for some time to come.

A growing wave of buyout activity is expected to signal a rebound for global mergers and acquisitions as companies take advantage of low interest rates and spend cash stockpiled during the economic downturn.

Several blockbuster buys have already been announced this year, including AT&T's recent US$39 billion (Dh143.25bn) bid for its US telecommunications rival T-Mobile and Duke Energy's $13.7bn acquisition of Progress Energy in January. That deal will create the largest utility company in the US.

Both of those acquisitions - and scores more in the US and Europe - are awaiting clearance from anti-trust regulators. But observers are hopeful such announcements will signal a quick return to health for the embattled mergers and acquisitions (M&A) market.

"It's positive on a global basis," says Antoine Drean, the chief executive and founder of Triago, which advises on fund-raising and secondary-market transactions for private-equity companies.

"You have record amounts of corporate cash sitting in company coffers. You have huge amounts of dry powder held by private-equity funds, and you're in an environment which is conducive to deal-making. You have relatively slow growth, so the expectation is that as the economy picks up investments made now will take off."

The statistics appear to bear out the notion of a pick-up for both buyout funds and cash-rich companies. According to figures from Bureau van Dijk, a research group specialising in M&A, $940bn of deals were announced in the first three months of this year, a 14 per cent increase from the same period last year.

But Amy Morris, a senior writer at the company, says while the value of deals is climbing, the number of transactions has fallen to 2004 levels. The big transactions, she says, probably reflects the increasing ease with which banks and investors can get financing for deals. Central banks in the developed world have kept prevailing interest rates near zero to stimulate lending and boost economic activity.

"The evidence suggests valuations remain high when there's the will and the financing to get the deal signed off," Ms Morris says.

Higher-value deals in smaller numbers might also reflect the increasing caution with which investors are approaching big cash outlays as a fragile global economic recovery gets under way, observers say. Money may be easier to raise, but potential companies looking for buyout targets are still being careful.

"It's still a fragile recovery, obviously," Mr Drean says. "There are a number of potential crises on the horizon that have people still operating cautiously."

The recent wave of deal-making has centred on developed markets such as the US and Europe. Activity is picking up, however, in the big emerging markets.

According to Bureau van Dijk research, the value of deals targeting Brazilian companies hit $81.8bn in the third quarter of last year and has since stayed above $40bn. That represents a huge leap from 2007 and before, when quarterly deal values typically ranged from about $5bn to $20bn.

For their part, the world's investment banks are rejoicing in the growing number of deals. Smaller firms that advise on mergers and acquisitions exclusively are doing particularly well as investors grow wary of large banks that have been singled out over conflicts of interests.

"It started getting bad, obviously, in May last year and went very, very quiet in August, but actually started slowing down a little bit before then," Nicholas Moore, the chief executive of Macquarie Group, Australia's largest investment bank, recently told Dow Jones. "Now this year … there's greater levels of activity and we can see a pipeline this year. How the pipeline translates will very much depend on market conditions between now and then."

But while global players celebrate a return of activity to the stagnant M&A market, private-equity houses in the Middle East are still sitting on the sidelines. The recent political turmoil in the region has put many deals on hold and forced some of the region's biggest buyout firms to retrench. Abraaj Capital in Dubai, the biggest private-equity firm in the region, is forging ahead with a number of transactions, including its acquisition of almost half of Emirates NBD's payment network subsidiary. Others, however, have not been so active.

Hisham el Khazindar, the co-founder of Citadel Capital, Egypt's biggest private-equity company by private-equity assets, says the country's recent revolution has put his firm "back into financial-crisis mode". He says Citadel is being "a little bit introverted" and is making sure the companies it owns weathered the storm well.

"The picture for the Middle East is, unsurprisingly, much less positive [than the global picture]," Ms Morris says. "That said, the first-quarter's deal value result was not as low as could have been expected. At $3.59bn it was 22 per cent down on the fourth quarter, but the decline did not come close to erasing a 152 per cent gain made at the end of last year."