Effect of Financial Crisis over Mergers and Acquisitions in GCC Countries

11 Pages Posted: 19 Mar 2009

Date Written: March 15, 2009

Abstract

The merger and acquisition (M&A) activities have grown significantly around the world over the last two decades, the amount and volume of mergers and acquisitions is reaching a record braking levels. Major factors underlying this process are attributed to emergence of globalization, low cost funding and current financial turmoil, hence the need to create large entities to be able to compete for seeking out growth and profits. In addition, the increase in capital flows across national boundaries due to economic reform programs and market liberalization in developing countries. Another key factor causing growing M&A is the increased globalization of investment seeking higher rates of return and the opportunity to diversify risk, and many businesses recognize the uncompromising demand to venture overseas, or within their region. Mergers and acquisitions are nowadays frequent events in organizational lives. The two terms are normally used interchangeably in strategic investment decisions, distinction among mergers and acquisitions are necessary. Mergers of equals involve two entities of relatively equal stature coming together and taking the best of each company. An acquisition involves a much easier process of fitting one smaller company into the existing acquiring firm. As the current financial crisis, the financial markets are being subjected to the volatile and uncertain environment, and markets have entered a vicious cycle of asset deleveraging, price declines, and investor redemptions. Credit spreads spiked to distressed levels, and major equity indices dropped by about 25 percent in October 2008. Furthermore, Weakening global demand is depressing commodity prices. Oil prices have declined by over 50 percent since their peak in 12 July, 2008, retreating to levels not seen since early 2007 - reflecting the major global downturn. So, this situation will drive a slew of M&A activities across the region in the light of the financial turmoil and collapse of Mortgage market, because many industries and sectors have hit by this financial turmoil. In our view, the M&A activities will be one of the solutions that governments and institutional investors have in the current situation. Despite of the gloomy forecast of global economy, the local governments are still a vital part of M&A activities such as American International Group Inc., the New York-based insurer controlled by the U.S. government. But the forecast of M&A in 2009 refers to the appetite for the large takeover deals that fuelled the boom of the past two years has vanished. This may help drive smaller deals, as robust companies buy competitors weakened by the tight credit markets. Moreover, every sector will have a handful of acquisitive companies that can take advantage of relatively strong equity and credit positions.

Keywords: Mergers & Acquistions, GCC, Financial crisis

JEL Classification: G34

Suggested Citation

Ravichandran, Krishnamurthy, Effect of Financial Crisis over Mergers and Acquisitions in GCC Countries (March 15, 2009). Available at SSRN: https://ssrn.com/abstract=1360249 or http://dx.doi.org/10.2139/ssrn.1360249

Krishnamurthy Ravichandran (Contact Author)

King Saud University ( email )

PO Box 165
Riyadh 11451, AL KHARJ
Saudi Arabia
00966565123239 (Phone)

HOME PAGE: http://faculty.ksu.edu.sa\76225

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