M&A Concept

Merger is a term used to describe the transaction which involves the combination of two or more companies and assets and the consolidation of their interests to form a single new and independent legal entity leading the previous entities to cease to exist. As a result, all rights and obligations of the lapsing companies are transferred to the new entity. This can be accomplished through the approval of the board of directors and majority of shareholders of both companies to the merger.

Acquisition is a term used to describe the transaction that involves financial and administrative control of one company over the business activity of another company and sometimes are called takeovers. This can be performed by purchasing all or a portion of the shares that are entitled to the right to vote in the General Assembly of the acquired company, whether the shares were purchased amicably or with hostility. In the latter case, the acquirer company acquires a majority stake in the acquiree company, but does not change its tradename or legal structure.

Merger Structures

Horizontal Merger: A horizontal merger takes place when two companies offering similar, or compatible, products or services to the same market combine under single ownership.

Vertical Merger: A merger between two companies producing different goods or services for one specific finished product. A vertical merger occurs when two or more firms, operating at different levels within an industry’s supply chain, merge operations. For example, an ice cream cone supplier merges with an ice cream producer.

Homogeneous Merger: A homogeneous merger is one between two companies serving the same consumer base but in different ways. For example, a TV manufacturer merges with a cable company to create a large, dominant player with only a few or no other competitors.

Market Extension Merger: A market extension merger takes place between two companies that deal in the same products but compete in separate markets.

Product Extension Merger: A product extension merger takes place between two business organizations that deal in products that are related to each other and operate in the same market

Conglomerate Merger: A merger between firms that are involved in totally unrelated business activities.

What are the Differences Between Mergers and Acquisitions?

1. Returns: If the return paid to the company shareholders is monetary and not stocks, the transaction is referred to as acquisition not merger. However, if the return is stocks, the process is a merger not an acquisition.
2. Company Fate: If a company does not cease to exist after another company buys its equities, the transaction is an acquisition, not a merger. Yet, if a company sells its shares and dissolves in the acquiring company and ceases to exist or both companies, the acquirer and acquiree, expire leading the way for a new company to emerge, the transaction is a merger and not an acquisition.

Mergers and Acquisitions in the GCC Countries

M&A Growth Rate

According to Kuwait Financial Centre ‘Markaz’ report merger and acquisition transactions in the GCC countries during Q1 2020 decreased by 51% relative to Q4 2019. None of the GCC countries recorded a growth in the number of closed transactions relative to the previous quarter. It is worth noting that the GCC economy experienced a significant slowdown due to the global COVID-19 outbreak and the uncertainty the pandemic has caused. As such, this has significantly impacted the level of M&A activity throughout the quarter.

Acquirers and Target Companies

Overall, the Kuwait Financial Centre ‘Markaz’ report noted that a majority of GCC firms preferred acquiring local or GCC companies as opposed to acquiring foreign targets. The UAE, Kuwait and Saudi Arabia were the most active players in terms of local activity.

Sectorial Transactions

The transactions that closed throughout the first quarter spanned across multiple sectors. With that being said, the sectors that witnessed the greatest level of activity throughout Q1 2020 were the Financials, Information Technology, and Industrial sectors.

UAE’s logistics sector led the top GCC M&A transactions during Q1 2020. The second largest transaction was taken on by Qatar Petroleum, that acquired a 25% stake in Qatar Fertiliser Company. 

Baker Mackenzie Report

Kuwait ranked fifth and penultimate in the Gulf in terms of the volume of M&A transactions closed during the first three months of this year, with only 3 trades, according to the Baker Mackenzie report.

The scarcity of mega-deals coincides with the closure of large sectors of the economies around the world to combat the Corona pandemic.

The UAE led the Gulf countries with 11 mergers and acquisitions, followed by Saudi Arabia with 9 trades, Qatar third with 5 deals, Bahrain equally with Qatar, and Oman finished second.

In terms of the value of mergers and acquisitions transactions in the Gulf, Saudi Arabia ranked first with $2.56 billion worth of deals, Bahrain came second with $420 million, the UAE ranked third with $352 million in transactions, and Qatar came fourth with $303 million.

The impact of the Corona Virus pandemic on the largest merger deal in the banking sector in Kuwait (Acquisition of Kuwait Finance House and Ali United Bank)

The Kuwaiti market was busy with the merger of KFH and Ahli United Bank (Bahrain), to form the largest banking entity in Kuwait and the sixth bank in the Gulf region, with assets exceeding $94 billion.

This deal will lead to the transformation of the largest Islamic banks locally and globally. According to studies in place, the deal will yield a 26% increase in earnings per share and thus a significant increase in the bank’s dividends for the next three years.

The formation of a unified Islamic banking entity operating in 9 markets comes in line with Kuwait’s investment strategic plan, as well as Kuwait’s New Vision 2035, which targets to invest $900 billion during the relevant period. The merger of the two banks will result in a strong banking institution with a large and robust share capital that will enable credit operations geographical and qualitative expansion. The capabilities gained from the merger will enhance the acquisition of new expertise, reduce the risks of doing business, and create quality local business opportunities that can be exported to other markets.

Ahli United and KFH Merger Regulatory Conditions

KFH, listed on the Kuwait Capital Market, has received approval from the Central Bank of Bahrain (CBB) for the acquisition of Ahli United Bank. However, CBB’s approval remains conditional on the fulfilment of certain determinants set by the Central Bank of Bahrain.

Among the most prominent conditions set by the Central Bank of Bahrain to complete KFH’s acquisition of Ahli United Bank:

1. Retain all Bahraini employees at AUB-KFH Bahrain, and increase Bahraini employment in executive positions within the merged banking entity in Bahrain.
2. Ahli United Bank external units should continue to be managed from Bahrain following the merger.
3. At least one third of the merged bank board members must be fully independent.
4. Allow each shareholder in Ahli United Bank the option to sell to KFH or hold his shares.
5. Continue to list Ahli United Bank on Bahrain Stock Exchange following merger with KFH in Bahrain.
6. Listing KFH on Bahrain Stock Exchange secondary market and allow the merged bank to invest in Kingdom of Bahrain sovereign securities, compliant with Sharia law.
7. KFH to bear the loan allocations as instructed by the Central Bank of Bahrain.

Government decision to postpone the merger and re-evaluate deal after Corona Virus pandemic

Following the outbreak of the Corona virus pandemic and the disruption of the business, KFH announced that it had received instructions from Kuwait Central Bank Board of Directors to re-evaluate the KFH’s acquisition of Ahli United Bank of Bahrain, after the situation stabilized and the implications of the Corona epidemic were ascertained. The target is to consider the feasibility of the acquisition and conduct a reassessment of the interbank stock trading ratio once the repercussions of the Corona crisis fall into place with respect to their assets. In the meantime, Kuwait Finance House Board of Directors decided to suspend the transaction procedures temporarily until next December, without deciding to re-evaluate the deal.

On a quick note, the Central Bank does not have step-in rights to make a decision on behalf of the General Assembly unless there is a risk to the economy in general. The Central Bank of Kuwait is not entitled to make decisions on behalf of the banks as to whether the merger is legal or not, simply because commercial consequences and losses are involved.

The reason for postponing the merger decision is not merger related, but rather to a disagreement over the merger value with Ahli United Bank. It is expected that the variations of bonds prices and the rise of US bonds will impact the deal once closed. Therefore, Ahli United Bank would incur greater finance costs, which will cause its profits to drop and bank’s value to mimic such trend. Having said that, the merging value would eventually change.