Merger & acquisition (M&A) activity in the Middle East appears to be on the cusp of a significant increase, particularly in the UAE where the underlying economic fundamentals, such as anticipated GDP growth continue to draw investors to the region, an industry expert said.

Will Seivewright, corporate/M&A partner at law firm Baker McKenzie Habib Al Mulla in the UAE was commenting on the second Global Transactions Forecast issued by global law firm Baker McKenzie.

The outlook for transactions while uncertain in the short term due to geopolitical factors is a more optimistic one in the years ahead, reveals the report.

After a year of political uncertainty, the forecast in association with Oxford Economics, predicts an uptick in transactional activity over the next four years, based on a gradual pickup in global economic growth in the years ahead, with GDP rising to 2.6 per cent in 2017, and 2.8 per cent in 2018. As threats to the stability of the global economy ease, and dealmakers regain confidence in the market, their apprehension should turn into appetite.

The forecast is based on the anticipation that EU and UK officials will make progress in forging a new relationship in 2017, and that the new US administration adopts a pragmatic stance on international trade and immigration, and sets out plans for fiscal stimulus. Also assumed is that China continues to manage its transition to a mature economy and the Eurozone continues its economic recovery, as well as financial markets continuing to hit new highs and investor confidence rising.

Paul Rawlinson, Baker McKenzie's global chair explained: "We are clearly still in volatile times but deal-making is there to be done. Strong corporate balance sheets, cheap finance and moderate growth across markets and key sectors all point to an improving M&A run-rate later in 2017, after a cautious first quarter, and a significant uptick in 2018."

M&A outlook

Global M&A and IPO activity slowed sharply in 2016 amid heightened economic and political uncertainty. Volatility in the US stock market, growing concerns about China's economic slowdown, and dropping oil and commodity prices caused dealmakers to become more cautious. Those concerns were compounded by the UK's vote to leave the EU and the US presidential election.

Michael DeFranco, global head of M&A at Baker McKenzie said: "We expect that environment of uncertainty to continue at least for the first quarter of this year and so the forecast predicts deal making to drop slightly in 2017 to US$2.5 trillion from US$2.8 trillion in 2016 as global investors wait for clarity over the UK-EU relationship, and the new US administration's policies on trade and investment."

Equity markets around the world rebounded following the US election, but the Forecast is cautious about assuming too strong a recovery in deal activity given the uncertainties that prevail into 2017.

Once greater clarity emerges, the report predicts global M&A activity to pick up to reach a peak of $3 trillion in 2018 (lower than the $3.4 trillion peak in the previous forecast). Then deal making will gradually slow in 2019, dropping to $2.8 trillion that year and $2.3 trillion in 2020, as global finance becomes more expensive and valuations start to fall.

IPO outlook

The forecast predicts IPO activity to rise modestly in 2017 from a weak 2016 and bounce back in 2018 and 2019 as companies that had postponed their listings return to public markets.

The forecast has global IPO activity rising from $133 billion in 2016 to $167 billion in 2017, then peak at $275 billion in both 2018 and 2019.

“Improved market sentiment and a number of countries looking to list state-owned companies to raise money, particularly in the CEE, CIS, Middle East and Africa should lead to a more benign market environment in 2017 with a real pick up towards the second half of the year into 2018,” said Koen Vanhaerents, global head of capital markets at Baker McKenzie.

Zahi Younes, Capital Markets/M&A Partner at Baker McKenzie's associated firm in Saudi Arabia said: “Right now there is a certain reluctance to go public until liquidity and investor sentiment improve, so in the short term, as the price of oil remains low, we will continue to see uncertainty in the markets. However, in the medium term, the Saudi government reforms, which involve a number of privatizations, together with the Capital Market Authority (CMA)'s desire to increase the number of listed entities on the Saudi stock exchange, should result in a positive impact on IPO activity in Saudi Arabia."

Sectors

From a sector perspective, a key driver of global deals will be the tech sector, where M&A is forecast to reach $415 billion by 2018 — the highest since 2000. Similarly we expect an uptick in IPO activity led by Snapchat's mooted IPO.

Vanhaerents noted: "If Snapchat's IPO is successful, it will be the largest US-listed technology offering since Alibaba Group in 2014."

Healthcare and in particular biotech and pharma deals will also fuel the upturn amid greater innovation, less potential regulatory intervention in the US and an increased role for private health providers in supplying public health services.

Deal making in the finance and consumer goods sectors will drop slightly in 2017 before rebounding in 2018. For finance, tech innovation and consolidation in Europe's banking industry is likely to boost M&A while the consumer goods sector continues to reap the benefits of cheaper energy and major growth in consumer spending.

Because of sustained lower oil prices, deals in the energy sector will only modestly recover in the next few years as oil prices gradually rise although 2017 could see the listing of the Saudi oil giant Aramco in what would be the biggest IPO in history.

A positive outlook

"Alongside this renewed market activity and investor confidence, global deal making has the potential to rebound in the coming years, given the massive cash reserves sitting on corporate balance sheets and near-record levels of private equity dry powder. Barring further shocks to confidence, investors will have the firepower they need to pursue acquisitions, and their apprehension will gradually turn into appetite,” DeFranco concluded. - TradeArabia News Service