EMEA Geopolitical & Macroeconomic Outlook

By Krystal Yip (University of Warwick), Noah Al-Hachich (Vienna University of Economics and Business), and Rayan Singh (University of St. Gallen)


Report Head: Timur Kurbanov (New York University Shanghai)


M&A within the EMEA region has never been unstable as before – key determinants such as Brexit, growing regulatory barriers and the coronavirus pandemic have introduced multiple layers of unease within the M&A industry. From a regional perspective, M&A volume was down 13% across EMEA, and saw a decrease in the number of mega deal transactions.


DACH (Germany, Austria, and Switzerland) played a pivotal role in EMEA M&A deal volume in Q1 2020 as it was accounting for 4 out of the top 10 M&A deals in the region. However, in April, DACH experienced 56% year-on year drop in M&A volume which brings much more uncertainty surrounding Q2 numbers. Total Middle East M&A deal activity rose to $9.3 billion out of 95 deals in Q1 2020, up from nearly $4.0 billion out of the 89 deals in Q4 2019. According to the XBMA Quarterly Report 2020, the Middle East, unlike Europe, only experienced a modest drop off from Q1 M&A activity in Q2.



German, Austria & Switzerland (DACH Region)


Job Protection Germany has rolled out an extensive furlough scheme called “Kurzarbeit” to prevent increased job losses amidst the coronavirus pandemic – a move which proved successful following the 2008-09 financial crisis. Critics argue that the “Kurzarbeit” will not be as successful or cost-effective as during the last recession, due to the unprecedented nature and duration of this crisis; at the height of the financial crisis, only 1.5 million workers received furlough payments, compared to 7.3 million in May 2020. German politicians’ commitment to preserving jobs may result in increased scrutiny on crossborder M&A transactions in the DACH region, which aim to achieve cost synergies by reducing employee counts, as regulators remain committed to low unemployment. The increased scrutiny will likely be reflected in depressed M&A levels, as more transactions may be cancelled or postponed due to job security concerns.


Slowdown in Takeovers


The European Union has recently increased efforts to block takeovers by companies which have “received unfair support from a foreign government”, likely diminishing foreign acquisitional demand in the region and depressing M&A activity. Further, the pace of approvals (e.g. compliance with antitrust or foreign investment acts) will be slowed down by government officials working remotely, thereby increasing the time for ongoing transactions to be evaluated. DACH regulators specifically have demonstrated their commitment to blocking takeover attempts, illustrated when German officials blocked U.S. government’s takeover of Curavec. German regulators have remained committed to blocking takeovers, particularly in key industries like healthcare and national defense, while German companies are recovering from the pandemic.



United Kingdom


Political Uncertainty


The political climate in the UK has disrupted M&A activity, yet at the same time has made acquisitions more attractive for oversea buyers. Valuations in the UK have been suppressed as COVID-19 delays Brexit negotiations and postpones the clarity that the market craves. Combined with the depreciation of the pound that was triggered by the uncertainty of Brexit, low valuations may be sufficient to attract inbound M&A. Arguably, it was found that more than half of dealmakers are less likely to invest in the UK due to the uncertainty Brexit has caused, especially against the volatile exchange rates and equity markets. On the 21st of June 2020, the UK Government also announced it will introduce the emergency legislation to block foreign takeovers and safeguard national interests, namely national security and financial stability. Therefore, despite the opportunities for overseas buyers, M&A deals within the UK will likely grow at a slow rate.


COVID-19 Outbreak


Despite the coronavirus’ undoubtable impact, cross-border deal volume is expected to be high; over half of UK respondents in EY’s latest survey said they expect to transact in the next 12 months. That being said, half of such respondents have annual revenues of $3.0 billion and higher and are likely to have the balance sheet strength to consolidate and make transformative deals in the year ahead. This may not be the same for struggling UK businesses – given that other economies like China are recovering quicker than the UK, we may see cash-rich oversea buyers acquiring struggling UK businesses with weak balance sheets. These cross-border transactions, however, will grow at a slow rate as acquirers are held back by strict border restrictions and formidable due diligence uncertainty. It is expected that there will be an increased focus on warranties, limitations/caps, and force majeure clauses within M&A transactions.


Sectors that will be less challenged post COVID include technology, online retail and healthcare as opposed to the more challenged sectors such as food and beverage, real estate, construction, hospitality, and leisure. Within the UK F&B sector, deal volume is down 40% year-on-year, while the deal value is down a staggering 90% as travel restrictions and lockdown inhibit growth.



Middle East


Falling Oil Prices


The Middle East (ME), renowned for their energy sector, is predicted to see a sharp drop in investments between 2020 to 2024. The region will see a $173m decline between 2020 to 2024 if Brent prices remain at its 20-year lows, within the $30-$50-barrel range. Given these constraints, oil and gas M&A deals will likely be thin on the ground in the coming months ahead as the market remains bearish. Prior to that, energy and power sector transactions were the main driving force for M&A in the ME region, accounting for 78% of the total value of deals last year. Unfortunately, analysts at Citigroup do not see fuel consumption back at last year’s level until well in 2022. After months of successful teleconferencing with the existence of Zoom and other online systems, business trips that once kept planes at full capacity may also come under scrutiny. Key to improving M&A activity in ME are for oil-producing companies to potentially diversify their portfolio by investing in downstream businesses such as refining and petrochemicals whilst building beneficial long-term oil supply deals.


Vision 2030


Recently, Saudia Arabia introduced the Vision 2030 agenda to reduce the nation’s dependence on oil, diversify its economy and develop public service sectors such as health, education, recreation and tourism. Healthcare and education have been important drivers of ME deal volume in recent years; in healthcare, market players have focused on building up their scale through joint ventures and acquisitions. An increasingly lucrative market in medical tourism has also been a driving move for specialized facilities such as IVF clinics and long-term care centers. As such, it is likely we will see growth within the sector. In the education industry, private equity backed commercial operators are looking to expand portfolios outside of the saturated UAE education market which was once growing up to 11% in previous years but is now at 3.5%. Egypt and Saudi Arabia have been deemed as promising candidates for expansion given that 60% of its student population now attend private schools and the nations are relaxing foreign ownership requirements.



Final Remarks


As a result of the environmental events, there are two possible scenarios for the M&A industry - the first is a further slowdown in the M&A volumes in the next two or possibly three quarters, reflecting global uncertainty, investors’ anxiety and shift of priorities as companies undergo restructuring. The second is that growth will continue, yet at a much slower pace as companies are interested in joining forces to mitigate losses, and lower valuation makes acquisition more attractive to buyers.

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