Foreword by Andrew Chilvers
For ambitious companies eager to expand into overseas markets, often the conventional route of organic business development is simply not fast enough. The other option to invest in or buy a business outright is far quicker but often fraught with unforeseen dangers. And even the biggest, most experienced players can get it badly wrong if they go into an M&A with their eyes wide shut.
If you search for good and bad M&As online the Daimler-Benz merger/acquisition with Chrysler back in 1998 is generally at the top of most search engines on how NOT to undertake a big international merger. Despite carrying out all the necessary financial and legal measures to ensure a relatively smooth deal, the merger quickly unravelled because of cultural and organisational differences. Something that neither side had foreseen when both parties had first sat down at the negotiating table.
These days the failed merger of the two car manufacturers is held up as a classic example of the failure of two distinctly different corporate cultures. Daimler-Benz was typically German; reliably conservative, efficient, and safe, while Chrysler was typically American; known to be daring, diverse and creative. Daimler-Benz was hierarchical and authoritarian with a distinct chain of command, while Chrysler was egalitarian and advocated a dynamic team approach. One company put its value in tradition and quality, while the other with innovative designs and competitive pricing.
Wissam Abousleiman discussed The Art of Deal Making: Using External Expertise Effectively as part of the M&A Advisory chapter.
How has the M&A landscape changed in the aftermath of the Covid-19 pandemic? Has it changed the nature of deal making in your jurisdiction and which industries have seen most activity?
M&A activity has always been slow in Lebanon and when it has happened in most cases has failed due to either poor financial planning or the inability to align either strategies or internal cultures. Now with the Covid crisis, this is just another nail in the coffin for the country economically. The sole and heavy reliance on the banking industry for more than 30 years finally unfolded creating economic disparity with unemployment soaring, banking capital controls, severe devaluation of the lira and escalating inflation.
But with this misfortune comes room for opportunity. It is obvious that the old economic and business models are outdated and ineffective, which gives room for restructuring and readiness to engage with investors on practical yet innovative solutions. In this respect we are expecting that the entire banking industry, which has some 60 banks for a population of 6 million plus, will undergo large scale M&As to reduce the number of financial institutions, including insurance companies. This will cut down the huge structural costs by using more technological solutions to shut many oversized branch operations.
As for other industries, we are also expecting increased synergies, as well as M&As within the agribusiness as the country steadily reinvests into its vast agricultural landscape to become more self-reliant. We also see these synergies on a smaller scale occurring between retail businesses, non-profits and crafts people as they look to boost their outputs and collectively improve their economic situation.
Of course, energy projects remain a necessity especially as countries look to reduce dependence on importing and/or consuming fossil fuels and demand more renewable solutions. So, beyond Lebanon and in other parts of the MENA, we have actively engaged in several renewable energy projects whose appetite we do not see receding for the coming decade, if not longer, as our energy needs continue to increase.
What advice could you give potential clients on effective pre-deal planning? For instance, preparing a business for sale in your jurisdiction or ensuring transparency for a buyer?
From the seller’s side, the biggest challenge they have is in their exposure in one or more of the following: weak compliance; poor financial planning; unproductive asset management, oversized structures, limited use of innovative technologies, and/or lack of corporate development of teams as a pathway to realize growth. All this puts strain on the seller’s balance sheet and increases exposure liability, making it an unattractive venture early on, or, at the least, puts buyers or investors in a stronger bargaining position than the seller would appreciate.
In short, a more corporate and business-minded approach is needed to elevate the burden and risk implications of these factors. Sellers need to consider performing regular due diligence or risk assessments to identify and effectively address, contain and/ or mitigate these risk factors. This should be complemented with a set of other healthy decisions, such as making use of qualified
tax advisors and auditors as well as legal counsel, who not only have local but also international capacities to advise on growth strategies and business development plans. Luck aside, success after all lies in the ability to plan ahead. Only then can the seller be ahead of the curve and take stronger bargaining positions.
From the buyer or investor side, it comes down in many instances to the culture factor. For the Middle East, saving face and avoiding shame is very important. Selling a business is usually considered a sign of weakness or loss of wealth and stature. This is an archaic trait that impacts employees and business culture as well. So, buyers need to considerably weigh the impact of this factor to ensure healthy transitions in case of a buy-in. Otherwise, if possible, the safest option would be an asset purchase, hence avoiding other possible areas of exposure.
What deal structures prove most effective in your jurisdiction (e.g. asset vs share deals)? Are there any important legislative anomalies that international clients considering a merger or acquisition in your jurisdiction should be aware of?
With increasing compliance requirements on the one side and lack of adherence on the other, coupled with a culture of everyone is a leader, M&As are rarely successful. For these reasons, apart from the few cases where an international company takes over local operations, it is more common to see asset acquisitions rather than full mergers. Still, in both instances, another matter of noteworthiness remains in assessing any underlying impairment in the business or its asset valuation as a result of the difference between seemingly strong past economic performance and current economic deterioration.
On a more macro level, new international market entrants need to be aware of banking capital restrictions as a result of the economic crisis and both government inadequacy and ineptness, especially in protecting struggling businesses. Still, this is circumvented when exporting to foreign markets and indeed there are many significant opportunities in the country, especially in the services, agribusiness and industry that if funded properly, with 1) falling operational costs due in part to the currency devaluation, 2) lesser constrictive regulations and compliance requirements 3) with lower operational costs, can yield higher returns in international markets.
Top Tips – Effective Negotiation Strategies In Your Jurisdiction
• Look for business synergies within familiar industries where there is abundance in technical skills and know-how as well as underutilized resources: 1) outsourced back office and technical services (engineering and architectural, medical research, IT, etc), 2) agribusiness and 3) industry.
• Hire reliable employees and advisors that are capable to communicate, financially plan and align business cultures to realize strategic goals.
• Look at the underlying asset value of the business and determine its fair value to establish sound expectations and plan for reasonable financial returns.