GCC Healthcare, Industrials & Materials and Financial Services Sectors Record Significant Growth in M&A Activity

In the GCC, healthcare, industrials & materials and financial services have recorded the largest fluctuations in mergers and acquisitions (M&A) activity, despite the gradual decline witnessed by the industry since 2014. According to research published today in The Boston Consulting Group’s (BCG) 2016 M&A Report, Masters of the Corporate Portfolio, companies that regularly acquire and divest businesses as part of their corporate strategy consistently outperform less active dealmakers in terms of shareholder return in the medium and long term.

While M&A deals are not setting records in terms of the volume of deals across the GCC, which recorded 46 deals since the beginning of 2016, there has been a definite increase in deals in certain sectors. 17% of the recorded deals were in the medical sector, while services and consumer goods accounted for 13% of M&A deals respectively, and 9% of the deals occurred in financial services.

“We have noticed an overall 2% increase in deal value between 2014 and 2015, despite the 26% decrease in the number of deals,” said Ihab Khalil, a Partner and Managing Director at BCG Middle East. “The number of deals recorded since the beginning of 2016, potentially indicates a further decline in the total number of deals to be expected. However, looking at global trends, this decline could be temporary, as the view of M&A acquisitions is changing. BCG’s 2015 M&A report confirmed that companies that do their homework and practice disciplined post-merger integration can indeed acquire their way to growth in both earnings and shareholder returns.”

This new BCG report, which was prepared in cooperation with Paderborn University, compares three types of dealmakers—portfolio masters, “strategic shifters,” and “one-timers”—using BCG’s proprietary database of more than 54,000 M&A transactions since 1990. Portfolio masters represent only 6% of the companies in the sample (1,339 companies), yet they accounted for almost 14,000 deals, or about 25% of global M&A volume over the past 25 years.

Strategic shifters are companies that frequently rebalance their portfolios through M&A; they are involved in two to four transactions over a five-year period. One- timers made only one acquisition or divestiture each over a five-year time window. But, with a combined count of 18,891 deals since 1991, they represent 35% of total M&A deals globally.

But one year after the deal announcement date, portfolio masters clearly outperform, as measured by relative total shareholder return (RTSR), a company’s total shareholder return compared with its sector index. Portfolio masters generate an average one-year RTSR post announcement of 4.1%—more than 1 percentage point higher than one-timers. Even more significant, portfolio masters generate their returns at significantly lower share-price volatility (36% standard deviation of RTSR as compared with 50% for one-timers), exposing investors to the lowest level of risk of all three types of dealmakers.

The research also shows that companies can increase their returns for shareholders by moving up the M&A ladder, from one-timer to strategic shifter or portfolio master. For example, the 37% of one-timers that moved up to strategic shifters generated a one-year RTSR of 4.5%. The 16% of strategic shifters that moved up to portfolio master status generated average one-year RTSR of 4.8%. By comparison, one-timers or strategic shifters that stayed in place or moved down the M&A ladder generally saw minimal or even negative RTSR as a consequence.

“For the typical CEO, M&A is a once-in-a-lifetime activity. But those that approach deal making as an industrial process create an advantage for their shareholders,” said Khalil.