The Roadmap to Successful Ventures in the Middle East Series – No 8
Choosing Acquisitions to Fast(er) Track
By Hugh Fraser, managing partner
Welcome to my weekly note with some personal views on what does/does not work when structuring business ventures in the Middle East region. My eighth theme is “Choosing Acquisitions to Fast(er) Track”.
The answer to the perennial question of “How long does it take to penetrate a target market in the Middle East region?” is usually “Much longer than hoped or planned for.” The conventional mechanism to fast track international business expansion for companies having the scale and resources to do so it to acquire an existing business in the target territory and to piggyback on its infrastructure including licences, vendor registrations, bank accounts and personnel visas. A cold start, especially if a technology trialing is involved, can easily result in 36 months of negative cashflow (or worse). But acquisitions can be the most expensive and riskiest mechanisms to deploy and in the Middle East region there are additional hurdles and risks to accommodate.
Here are my Top 5 golden rules on this theme:
- Acquisitions are not conventional in the Middle East
There is not the same North American and European tradition of family-owned businesses being sold away in whole or in part to trade buyers or private equity funds, so acquisition opportunities tend to arise in ventures which are beneficially owned by expatriates. Local minimum national ownership rules also make it very difficult to get western investors comfortable that the beneficial ownership of the business can be securely fenced in relative to the official legal ownership and this acts as major brake on acquisition activity. The attitude and co-operation of local registered shareholders can be hugely significant.
- Asset Deals don’t work for New Entrants
The use of assets deals to address speed and risk criteria are hard to fit where the purchaser does not have any existing legal infrastructure in the territory. The time, cost and effort needed to secure licences, vendor registrations, registered approvals to issue visas for personnel and client approvals (often NOCs) to the assignment or novation of contracts can be show stoppers for many asset deal acquisitions, unless the purchaser already has a substantive business and legal infrastructure in the territory.
- Due Diligence is challenging
Unlike western jurisdictions there is a paucity of independent third-party reference sources and public registers from which to conduct due diligence. Therefore, the ability to conduct adequate due diligence may normally depend on scrutinizing documentation and information provided by the target itself. This injects a higher risk factor into the investment decisions.
- Closing is complicated
Any transfer of shareholdings in the region is almost certain to involve regulatory approvals and perhaps public advertisements. This means that escrow arrangements are common to ensure that the timing of the transfer of title and movement of purchase payments can be aligned and risk managed. The closing process is also bound to involve legalised powers of attorney and ancillary documentation and this needs advance planning and preparation to avoid frustrating (and embarrassing) delays when the transaction is cleared for landing.
- Post-Closing enforcement need prevention rather than cure
the multi-jurisdictional aspects of Middle East transactions and the associated time, costs and uncertainties surrounding associated legal proceedings means that greater emphasis has to be placed on deferred consideration, due diligence, rights of set off and security mechanisms as opposed to representations, warranties, undertakings and restrictive covenants. Attention to a pragmatic and workable dispute resolution clause is highly recommended but often missing.