The article originally appeared in The National | Business
The GCC’s investment bankers must be a stressed lot – too much work and such little reward.
The fee-based investment banking business has four key components – syndicated loans, equity capital markets, debt capital markets and mergers and acquisitions (M&A). While in other markets we can witness activity across these four components, in the GCC investment banking advisers depend on syndicated loans for their survival – 50 per cent of total investment banking fees on average.
Equities is dull thanks to poor performing capital markets and the related dull initial public offering environment.
The debt capital market looks promising given the slew of activity expected from sovereigns and corporates.
However, the sticky point seems to be M&A, which can be erratic and suffers from some idiosyncrasies.
The fallout of the global financial crisis and the recent oil price crash have dented the stamina of corporates, leading to weaker balance sheets for many companies. The operating environment has become difficult because of stagnant earnings and increased cost of capital. After hitting a peak of US$70 billion in 2014, our research expects that corporate earnings will touch $62bn this year. This should be a dream environment for M&A advisers, as difficult environments force corporates to restructure, improve efficiency and productivity, hive off non-core assets and concentrate on strategic business. In other words, corporates need the help of M&A advisers to do all this.
However, the value of announced M&A transactions reached $18.7bn during the first half of this year, a decline of 29 per cent compared with a year earlier, and the slowest first six months for deal-making in the region since 2014, according to Reuters.
What can explain this conundrum?
The GCC market is dominated more by private companies than public companies. Scouting opportunities in the private market are onerously difficult because of lack of transparency and family control. This prevents deal flow even though there may be genuine need for M&A. Even when assuming healthy deal flows (cases where companies express interest to hive off non-strategic units), the actual completion of transactions can be low (poor deal closures), as poor information can prevent meaningful negotiations and conclusion of transactions.
The M&A environment in the GCC is also characterised by dominance of "mega" deals. Take the recent example of Emaar Properties chairman Mohamed Alabbar leading a group that bought a $2.36bn stake in Americana along with a group of investors; or the merger of National Bank of Abu Dhabi and FGB, which is expected to create a mega-bank with total assets of about $171bn; or the celebrated Emirates Bank and National Bank of Dubai merger to form Emirates NBD in 2007.
Such mega-deals can crowd out other transactions and can also create league tables – rankings of investment bankers – that can look very different and distorted from one period to another, thus making it difficult to compare.
How will things be going forward?
Given the low oil price environment, corporate stress levels are bound to increase. The need to restructure, enhance productivity and efficiency and hive off unnecessary non-strategic assets will be pursued vigorously by private and public players.
This should certainly be good news for investment bankers. Also, it is unusual that companies are sitting on very high levels of cash as measured by data available for publicly listed companies. At the end of last year, total cash levels reached about $250bn, with financials (read banking) accounting for $155bn. Hence, banking-related M&A transactions will continue to see action, followed by energy and telecoms. Mega- deals may continue to dominate the scene, but given the oil price effect across the board, representation from mid-level segments and SMEs can also increase.
This will help to improve the ratio of pipeline to closure, which should be good news for investment bankers.