What do companies get out of mergers and acquisitions

The reasons why companies resort to mergers and acquisitions to grow their business. But this could prove to be disruptive.

q How do economies benefit from mergers and acquisitions (M&A)? a Companies typically enter M&A deals to cut costs and create growth opportunities. They might want to establish their presence in new markets or expand it in those that show particular growth potential. Firms have a number of ways of growing their business: organically, by acquiring competitors, or by entering partnerships. But entering a new market on your own and building up a client base and distribution channels can be time-consuming. So companies with sufficient funds often prefer to buy competitors to speed up the process.

However, acquisitions can be disruptive for both sides. As a result, many deals fall apart. One high-profile corporate divorce is that involving Germany's Daimler and the US's Chrysler. Economies benefit from M&A deals because these generally make companies more competitive. And bankers, lawyers and consultants earn M&A fees. What is a recent example that fits that mould. The purchase by Bharti Airtel, the Indian telecommunications company, of the operations of Zain in sub-Saharan Africa springs to mind. "That deal was clearly driven by the desire to grow market share, the good old-fashioned reason for an M&A deal, if you like," says Christopher Niehaus, the managing director and joint head of investment banking for the MENA region at UBS. "Bharti made no secret that they wanted to expand in Africa. We can expect to see more consolidation in the region in the telecoms market in the Middle East and Africa. "Deals such as that trigger follow-up deals. Every time there is one big merger, you will see more activity afterwards because the others need to catch up."

Has M&A traditionally been a big thing in the Middle East? Middle Eastern M&A is a comparatively new phenomenon. It was only during the latter part of the last global merger wave between 2002 and 2007 that the region's M&A sector came to life. While the West had seen numerous M&A waves, it was really the first time that developing countries played a key role. Deals between the developing world and the developed countries grew by an annual 20 per cent, four times more than within each. And the UAE, flush with oil money, was one of the most active buyers.

As the region grew more prosperous during the last decade, its ability to complete major transactions also grew. As companies accumulated the fire power - cash in their coffers and higher price-earnings ratios that made their shares a more valuable acquisition currency - they became more likely to go on shopping sprees. They were joined by regional sovereign wealth funds and state-related investment companies that completed many high-profile deals such as Istithmar World's acquisition of the high-end retailer Barneys New York. All of that ended abruptly in the middle of 2008. Things fell quiet last year, when M&A deal volumes fell by half from 2008 and 2007 and were down one third from 2006. It was only after midyear that there were signs of life, such as Yahoo's acquisition of the Arabic Web portal Maktoob and the decision by the Dubai Financial Market to merge with competitor NASDAQ Dubai.

What was one of the flagship deals of the last M&A boom? In 2005 and 2006, Dubai World's DP World snapped up P&O as well as the international terminal business of CSX for about US$9 billion (Dh33.05bn), making it one of the world's top three operators of international marine terminals. [e-mail]