Q2 2016 Middle East cross-border deal-making steady despite global decline: Baker & McKenzie Report

Global cross-border M&A volume and values were subdued in Q2 2016, as investors held their breath, but the Middle East region saw an increase in both inbound and outbound cross-regional activity in the first half of 2016, according to global law firm Baker & McKenzie’s quarterly Cross-Border M&A Index*.

Hesitancy persisted as global markets remained volatile, and consequently, the Index, which tracks quarterly deal activity using a baseline score of 100, dropped to 176, down 33% from Q2 2015’s total of 263, the lowest Index result since Q3 2013. Buyers announced 1,320 cross-border deals worth US$214 billion, a 4% drop in volume and a 45% drop in value compared to Q2 2015. Although North America was the largest cross-regional outbound market by volume, the EU (particularly the UK) and North America experienced the largest reductions in deal values. 

The drop can be attributed, at least in part, to fewer megadeals – those above US$5 billion in value – in the first half of the year. While there were 21 megadeals struck in the first half of 2015 with a total value of US$296 billion, the 18 thus far in 2016 are worth 23% less at US$228 billion. Only three of those occurred in Q2 2016 (worth US$29 billion). 

On the sector side, Industrials topped the volume charts with 199 deals, while the Pharmaceuticals sector produced the highest-value Q2 deal: Boehringer Ingelheim's US$12.56 billion acquisition of Merial.  

The Middle East Index dramatically increased from its Q1 2016 position of 141 to 437 in the second quarter of the year, signifying the strength of cross-border M&A activity in the region, with the UAE standing out as the most active country in the region in respect of both inbound and outbound investment. 

“Cross-border M&A activity in the Middle East has fared relatively well in 2016 off the back of a record breaking 2015, despite the volatility across global economic markets,” said Will Seivewright, Corporate/M&A Partner at Baker & McKenzie Habib Al Mulla based in the UAE. “The underlying economic fundamentals, such as anticipated GDP growth in the UAE and Saudi Arabia, continue to draw investors to the region, and we expect cross-border deal activity to remain steady as organizations begin to strategically prepare for each country’s long-term development plans leading up to 2020 and beyond.”

"Risk factors continue to influence investment decisions, but we are already seeing more strategic and focused outbound investment from the Middle East,” added Zahi Younes, Corporate & Securities partner at Baker & McKenzie's associated firm in Riyadh. “GCC countries' increasing efforts to diversify their investment portfolios will change the M&A landscape, allowing them to become key strategic investors around the world and enabling international investors to capitalize on opportunities.”

Inbound Middle East M&A

The UAE attracted the most interest from international investors in H1 2016 and was the target country of 12 of the 16 deals into the Middle East. The US remained the top bidder country for the first half of the year, with five deals valued at US$60 million, while China led by value with three deals valued at US$1.37 billion. 

The volume and value of deals targeting the Middle East increased from six deals worth US$349 million in Q1 2016 to 10 deals worth $1.4 billion this quarter.

The Energy & Utilities sector was the busiest in Q2 2016 by both deal volume and value, with three deals valued at US$1.37 billion, the top two driven by China.

Outbound Middle East M&A

The volume of outbound M&A from the Middle East in H1 2016 was slightly up on H1 2015 (with 35 deals compared to 33 deals). Notably, the UAE drove over half of the outbound deals from the Middle East, leading on 17 of the 35 deals seen in the first half of the year, followed by Qatar with eight deals and Saudi Arabia with four.

The drop in mega deals in 2016 resulted in lower deal value overall in the first half of the year, with outbound M&A dropping from US$9.95 billion for H1 2015 to US$5.24 billion for H1 2016. 

However, Q2 2016 deal values eclipsed the previous quarter - jumping from US$985 million in Q1 2016 to US$4.26 billion in Q2 2016. Saudi Arabia's Public Investment Fund's US$3.5 billion acquisition of a 5.6% stake in Uber Technologies was a major contributor.

The top sector by value was the Technology sector with two deals valued at US$3.61 billion, while the Consumer sector led by volume with four deals valued at US$193 million.