Saudi Arabia and other Middle Eastern countries have become one of the most active M&A markets. Unprecedented economic growth driven by government policies, crude oil demand, and investment in tourism, sports, infrastructure, green initiatives, and technology are all playing a part in increasing the attractiveness of the region to dealmakers and investors.

Moreover, Saudi’s Vision 2030, which aims to reduce the country’s reliance on oil and gas and diversify its economy, is driving dealmaking activity there. However, regulatory and cultural challenges persist, which can make doing business in the region difficult for some.

So, what does this mean in terms of deal activity in 2023 in the region? Sonia Abdul-Rahman, Pietro Castronovo, and Stuart D’Souza shared their thoughts at a recent webinar moderated by Datasite’s John Komninakidis.

Driving forces
The Middle East was one of the most buoyant markets for both M&A and IPO activity in 2022. What’s driving the activity in the region?

“The first and most important driver is related to the implementation of Vision 2030, and specifically the activity of the sovereign wealth fund in the Kingdom, but also outside of it,” explains Castronovo, partner at Oliver Wyman. “The second driver is linked to developing a food security strategy in the country. We know this is a key priority. We have seen some deal activity in this area already in 2022. But this is definitely something where we expect to see a significant amount of transactions in the next 12 to 24 months. And this is linked to the objective of the Kingdom to enable local production of agri-food products to reduce reliance on external sources and on exportation.” 

Indeed, according to Deal Drivers: EMEA 2023 Outlook, “Some of the biggest sector targets [in the region] have been technology, renewable energies, and agritech, which is indicative of these major buyers' focus on the future. One impediment to this trend is if the price of oil begins to roll over on concerns of a global recession and weakened demand. There has been some evidence of this being the case in the latter months of 2022. However, sovereign wealth funds remain heavily capitalized and will likely continue being reliable buy-side participants in the Middle East and further afield.”

“And the third driver that we have seen in terms of deal drivers is about venture capital,” says Castronovo. “It’s quite interesting how in the past two to three years the Kingdom has been able to intensify the number of deals and the size of funding available, as well as the platform for it. I think it will soon be the leading platform when it comes to venture capital and early-stage investment.”

Additionally, Abdul-Rahman, partner at White & Case, says that over the last few years because of low oil prices, as well as the Saudi government’s efforts to privatize its state-owned companies, she has seen an uptick in M&A activity there, as well as a large wave of IPOs in the Kingdom. The result: “In terms of deal flow, it has been very healthy in the Kingdom, both on the M&A and the IPO side. And I think that that's not slowing down. The deal flow is remaining strong and I think that because of Vision 2030, it's just going to continue in this direction for a while longer.”

Activity everywhere
So, in which sectors is the dealmaking taking place? According to Castronovo, it isn’t linked to just a few sectors, but across all key industries in the region.

Abdul-Rahman agrees: “Through Vision 2030, Saudi Arabia is trying to diversify its economy away from oil and gas. So, we have really seen a boom in M&A activity across all the key sectors of the Saudi economy. The main deals that we have seen were in infrastructure, healthcare, tourism, and even the education sector as the Kingdom is trying to build this workforce. The Public Investment Fund (PIF) and the public sector has really been at the forefront of such M&A activity and have been leading the way in terms of not only strategic investments in all the sectors, but also the country's efforts to increase local, regional, and foreign investment into the Kingdom.”

“There has been a huge increase in the number of foreign-owned entities being registered in the Kingdom in the past few years,” adds D’Souza, CEO of Arabian Enterprise Incubators. “As a result, our corporate services business unit, which sets up companies and provides back-office services, has never been busier. And I think that is a fair reflection of the market. It’s being driven not only by the opportunities but also by the regulatory reform in the Kingdom. There’s been a tightening of regulations around the sort of fly in-fly out model that a lot of companies previously pursued to deliver projects in the Kingdom. Now, they are being told that if you want to do business in the Kingdom, you need to be registered in the Kingdom.”

Greening up
Moreover, the Middle East has some of the highest ‘green’ activity globally, with commitments to reach net zero carbon emissions by 2060 in Saudi, constituting a more than SAR700 billion of investment in the growth of the green economy.

Castronovo says that the ESG and sustainability element has been one of the top discussion items with clients. “It will drive a lot of agendas in terms of value creation transformation within companies. So, it's not only related to M&A activities, but it’s one of the key priorities regarding how to transform a business and make this not just a regulatory exercise, but something that is actually driving the agenda and value for the next 20 to 30 years.”