Mergers & Acquisitions

Mergers and acquisitions can be tricky, but if implemented correctly and in the right financial climate they can unlock growth.

Image credit: Shutterstock / Mongkolchon Akesin

Mergers and acquisitions are common occurrences in the world of business.

Mergers can help companies by creating synergies through economies of scale and economies of scope, as well as risk diversification.

“Companies spend more than USD2 trillion on acquisitions every year,” according to Harvard Business Review, which cites boosting corporate performance and longterm growth as the perceived benefits of acquiring another company.

Yet another typical incentive behind a merger is to maintain dominance, which happens when a market leader acquires one of its competitors.

On average, however, only around 50% of mergers are fully successful, as there are quite a few prerequisites for a successful business merger.

Merger deals evidently fare better in some sectors than others. Generally, businesses which are more versatile in their operations such as financiers are better candidates for mergers than those involved in niche industries.

Mergers are often met with success, for instance, in investment companies, such as mutual funds, exchange-traded funds (ETFs), private equity funds, and even hedge funds. This is attributed to the particular architecture of such companies.

An investment company is essentially a business that pools capital from various sources to invest in a diversified portfolio. The acquisition of another investment company which—almost by definition—has a similar organizational agenda is just expanding the portfolio one step further.

The success rate of a merger or acquisition also depends on the financial climate of the market in which it takes place, partly because the host nation’s regulatory framework significantly influences the merger or acquisition in progress.

To use Kuwait as an example, bodies such as the Kuwaiti Capital Markets Authority (CMA) and the the Competition Protection Authority (CPA) oversee all mergers in the Gulf nation to ensure compliance, including with competition laws.

Nevertheless, the regulatory framework must not create a bottleneck for legitimate mergers. And, once again, we can look at Kuwait as a case in point. The year 2022 saw a number of high profile mergers across the Kuwait private sector. Kuwait’s largest Islamic bank, Kuwait Finance House, acquired the Bahrain-Baer Ahli United Bank recently.

Aside from the regulatory framework, the general economic climate also matters. Kuwait is home to a number of sizable investment companies, creating a vibrant finance sector. Since many such investors and financiers are still evolving, mergers are bound to happen.

Thanks to such a conducive ecosystem, Al-Safat Investment Company completed a successful merger with Cap Corp Investment. While commenting on the merger, Al-Safat Investment’s chairman, Abdullah Hamad Al-Terkait explained that his company “enjoys a stable financial position, and it prepares to enter a new phase with its merger with Cap Corp,” according to Kuwaiti Times.

Al-Safat Investment Company’s resilience is perhaps best reflected in its ability to survive two major financial crises and making a comeback to be re-listed in the country’s stock exchange, Boursa Kuwait.

Studies show that a previous track record of “resilience” in the face of adverse economic conditions is a reliable predictor of success in future acquisitions.

Abdullah Hamad Al-Terkait recently talked to TBY about the benefits of his company’s recent merger and future partnerships, which will give Al-Safat Investment a footing in new markets, pointing out that “an important part of investing is to diversify, and by investing in Europe and Asia, Middle Eastern investors can minimize the risk of their investments, while really empowering their portfolios.”