Analysis of Mergers and Acquisitions: UAE Market, Types, Motives

This research paper provides a detailed analysis of mergers and acquisitions (M&A) within the corporate environment of the United Arab Emirates. It defines M&A, distinguishes between mergers and acquisitions, and explores various types, including horizontal, vertical, market-extension, product extension, and conglomerate mergers, as well as asset and stock purchases. The study examines the motives behind M&A, such as synergy, diversification, accelerated growth, increased market power, and acquiring assets at bargained prices. It also discusses the advantages and disadvantages of M&A, considering both short-term and long-term goals, and provides a brief overview of relevant literature. The report concludes that M&A can stimulate economic growth but requires careful implementation to avoid negative consequences. The document is contributed by a student and available on Desklib, a platform providing study tools and resources for students.

Mergers and Acquisitions
MERGERS AND ACQUSITIONS
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Mergers and Acquisitions
Table of Content
Abstract......................................................................................................................................3
Mergers and Acquisitions..........................................................................................................3
Introduction................................................................................................................................3
Methodology..............................................................................................................................4
Research body............................................................................................................................4
Differences Between mergers and acquisitions......................................................................4
Types of mergers and acquisitions.........................................................................................5
Arguments of mergers and acquisitions.................................................................................7
Merits and Demerits of mergers and acquisitions..................................................................9
Review of relevant literature on M&A....................................................................................10
Overview of Corporate M&A in the UAE...............................................................................11
Conclusion............................................................................................................................11
References................................................................................................................................13

Mergers and Acquisitions
Abstract
The main aim of this research paper is to study in detail and understand the concept of
mergers and acquisitions in a United Arab Emirates corporate business environment. The
objective is to establish the main issues that can be associated with merging and acquisition
especially the motives, the types and the disadvantages and advantages of acquisitions and
mergers. The paper will also distinguish merger from acquisition and ascertain whether it is
harmful or beneficial to firms that want to enter. The report reveals that mergers and
acquisitions directly affect profits, leverage buy-out and dividends. The study concludes that
Mergers and Acquisitions often stimulate development and economic growth of a nation. It is
therefore recommended that mergers and acquisitions be carefully implemented by firms so
as to avoid fall out.
Mergers and Acquisitions
Introduction
The key purpose of any firm is to maximise profit over the years so as to increase shareholder
wealth by increasing dividends. The business word is growing at an alarming rate prompting
organisations to adopt different tools and techniques for profit maximisation. Some events in
the market require organisations to respond quickly in order to achieve a lot of gains such as
launching a new product, portfolio increase or when joining new markets (Bonaime, et al,
2018). With these events firms require a lot of financial resources so as to achieve objectives
in a short time while enjoying market monopoly during that period. Organisations especially
small and medium sized who are unable to raise enough finance to satisfy the growing
demand experience huge problems and are left with an option of either merging or exiting the
market. Essentially mergers and acquisitions are the only viable options for small
organisations to survive in emerging markets (Wu and Chiang, 2019). Mergers and
acquisitions are not the same but normally used interchangeably.

Mergers and Acquisitions
Methodology
For research purposes the study considered a corporate merger and acquisition scenario in the
United Arab Emirates (Lebedev et al, 2015). This being a qualitative study the research
questions how and why mainly, a deep study of the reasons is also carried out for better
knowledge and understanding of mergers and acquisitions in regards to strategic planning and
due diligence.
Research body
Mergers and Acquisitions can be defined as a process that involves combining two
companies into one with a goal of achieving synergy whereby the formed company is much
greater than the two former entities. Mergers typically occur when two similar businesses
agree to join forces by recognizing the benefits of the other company in terms of efficiencies,
improved capabilities and sales increase. Often the two companies become equal partners
with mutually agreed fair terms in the new venture.
Acquisition happens when one company buys another company then operates it as one.
Acquisition is normally implemented by purchase of a company’s asset or by acquiring more
than fifty percent ownership of a company’s paid up share capital (Howson, 2017). The firm
taking over is referred to as the acquiring company and the weaker company being acquired
is the target company. The acquiring company is more superior in terms of structure, size and
operations. Depending on the beliefs of the company that is being acquired the process can
be friendly or hostile, some acquired firms prefer to be an operating unit and others prefer to
be incorporated.
Differences Between mergers and acquisitions.
Although commonly used within the same context mergers and accusations are not
synonymous;

Mergers and Acquisitions
 A corporate strategy whereby two firms amalgamate to form a new firm is known as a
merger and a corporate strategy in which one firm buys another one and has control
over it is known as acquisition.
 Two organizations dissolve to form one in a merger but in acquisition the two firms
keep their existence.
 Similar companies in terms of nature and size go for the merger but in acquisition the
bigger company takes over.
 Two is the minimum number of companies required in acquisition and a merger
requires three as the minimum number.
 Depending on the current situation acquisition can either be voluntary or involuntary
but mergers are always voluntary.
 Acquisition requires less legal formalities as compared to mergers.
Types of mergers and acquisitions
There exist several kinds of mergers as follows:
Horizontal merger
This is a merger between organizations that are in direct competition with each other
(Lebedev et al, 2015). Horizontal mergers are mostly adopted with an aim of improving
market power and benefiting from huge economies of scale while exploiting merger
synergies.
Vertical merger
This is a contrast of the horizontal merger. It is between two firms that operate within the
same supply chain, two organizations combine along production and distribution business
process (Lebedev et al, 2015). The objective of a vertical merger is to ensure quality control,
improve information flow along the merger synergies and supply chain.
Market-extension merger

Mergers and Acquisitions
It is a merger between organizations that sell the same or closely related products or services
but operating in different markets (Uhlenbruck et al, 2015). Gaining access to a vast market
and improving the client base is the main goal of market-extension mergers.
Product extension mergers
This refers to a merger between firms that make related services or products and operate
within the same market (Pelov and Nguyen, 2018). This type of merger enables the
businesses gain more customers together by grouping their products. Since these companies
produce related but not the same products and services it is important to use related
distribution channels, select a common production process that can work to their benefit and
a common supply chain.
Conglomerate mergers
It is a merger between totally unrelated companies (Uhlenbruck et al, 2015). A conglomerate
merger can either be pure meaning the businesses are unrelated and operate in distinct
markets or mixed conglomerate merger meaning two companies interested in expansion of
target markets or product lines. Since the two firms operate in unrelated markets and produce
different products or services there is a huge risk of business shift.
Asset Purchase
The acquiring firm purchases assets but not liabilities of the target company the purchase
contract clearly specifies the assets to be purchased. The buyers have the privilege of
choosing the assets they would like to acquire and liabilities to assume (Pelov and Nguyen,
2018). Asset purchase is common when a buyer is looking to acquire a part of a company or a
single business unit. The process of selecting and transferring certain assets only can be
difficult and time consuming. Some assets like permits and licenses are not transferable
therefore a loss for the buyer. The buyer offers cash to get the assets, this method of payment

Mergers and Acquisitions
is not ideal most times since it involves allocation of the purchasing price to the assets
creating huge tax consequences.
Stock purchase
In this type of acquisition, the buyer gets the stock of the target business from the
stockholders. The targeted company will be under new ownership but will remain intact, the
buyer owns assets, liabilities and majority voting shares (Pelov and Nguyen, 2018). This type
of purchase provides some benefits to the buyer such as lower taxes on earnings, day to day
business is also not affected and continues normally, operations are still run by the seller
making the process shorter and cheaper and the value derivation from the acquisition is easier
since all the assets contracts are owned by the buyer. This type of purchase is also less
contentious but in the long run the buyer can face a major challenge of diminishing value of
acquisition because the buyer inherits legal and financial problems including any pending
liability.
Arguments of mergers and acquisitions
There are a number of motives that account for the emergence of mergers and acquisitions
such as;
Synergies developed through Consolidation
Synergy is a circumstance whereby the sum of individual combining businesses is less
valuable compared to the combined firm (Lebedev et al, 2015). Synergies are benefits that are
unrelated to economies of scale such benefits include managerial capabilities, creativity,
innovation, operating economies and increased opportunities. Firms looking to acquire
normally target undervalued firms. Increasing shareholders wealth is the key motive in
acquisition.
Diversification

Mergers and Acquisitions
Risk reduction can be easily achieved through diversification, the correlation between the
merging entities will determine the extend in which the risk will be reduced, negative
correlation increases risk reduction and positive correlation reduces risk reduction (Masulis,
and Simsir,2018). Firms diversify in order to achieve technological changes, growth and
sales, stability, favorable competition shifts and conducive growth developments. Another
vital motive for a firm to merge with another is entrance into new areas or new product
introduction to the market this will help the firms cover a bigger geographical area. Cyclical
and seasonal fluctuations can be easily overcome through product diversifications resulting
from mergers.
Accelerated Growth
Growth in companies can be achieved through expansion of its existing markets or
penetration into new markets. The dynamism, viability and value enhancing ability of any
organization is sustained by growth. When a company is growth oriented it is able to attract
and retain the most qualified workforce through job enrichment and career development.
Other factors being constant, growth increases profits and shareholders value (Lebedev et al,
2015). When an organization can no longer grow within itself due to lack of resources it can
expand externally by combining operations with other firms through acquisitions and
mergers. Internal growth requires a lot of time and resources thus inadequacy of these
resources deter a company’s growth pace, it is therefore wise to acquire these limited
resources externally through mergers and acquisitions.
Increased in Market Power
A business combination can possibly maximize the share of the market of the combined firms
which in turn increases profitability of the business as a result of increase in the economies of
scale. The firms power of bargaining with suppliers, buyers and labor is also improved
(Howson, 2017). The combined firm can also utilize technological advancements against

Mergers and Acquisitions
price wars and discontinuance; therefore supernormal profits can be achieved by the firm due
to limited competition.
Assets at acquired at bargained price
Acquisition can be seen as an opportunity to obtain assets particularly plant, equipment and
land at a lower cost than in comparison to the market current price (Howson, 2017). An asset
can be procured cheaply by acquiring an organization that already operated and owned the
asset, this reduces the risk since the asset was already operational.
Increased Financial Capability External
Many mergers come into existence when the firm that is acquired is unable to finance its
operations, it mainly affects growing firms with expanding financial requirements, mostly
these firms are unable to access long term debts, bank credits and equities (Bonaime, et al,
2018). When this situation arises, a large firm with enough finances can take advantage by
proposing a combination to the firm. The firm that is smaller can try and request two or more
firms to propose a merger to bring completion into their bidding process for acquisition.
Merits and Demerits of mergers and acquisitions
The merits and demerits of acquisition and mergers are highly dependent on the new firm’s
short term and long-term goals (Arikan & Stulz 2016). The following are some of the merits
and demerits of mergers and acquisitions
Advantages
 One of the main reasons for companies to enter into merger and acquisitions is to
control the market and merge their power (Arikan & Stulz 2016).
 Synergy is another advantage. Synergy allows the new entity to have improved value
efficiencies and cost saving strategies.
 The merged firms can enjoy economies of scale created through sharing of resources
and services. Cost reduction is also achieved.

Mergers and Acquisitions
 Risk reduction through proper financial risk management using innovative techniques.
 Retention or growth of a competitive edge through acquisition of new technological
know-how.
 Tax benefit by increase of monetary leverage, utilization of alternative tax benefits
and proper use of tax shields.
Disadvantages
 Loss of experienced workers with a direct impact on business understanding.
 After the merging and acquisition process the employees of the small merging
business may require re-training (Arikan & Stulz 2016).
 There is a possibility of getting surplus employees in departments leading to
friction and unhealthy competition.
 When two similar firms merge it increases the Possibility of work duplication.
 Delaying in implementation of merger and acquisition will increase cost.
 Huge uncertainties regarding approval of the merger by the relevant authorities.
 Reduces flexibility.
Review of relevant literature on M&A
Pelov and Nguyen, (2018) stated that for an organization to be successful, growth is
inevitable. Most, if not all companies work towards growth. It is a common observation that
big companies strive to be bigger and small companies aspire to grow. As much as all
companies want to grow bigger with similar reasons across, different organisations apply
different strategies for this goal. The best strategy is the one that pushes the company
progressively to achieve its goals and objectives, mergers and acquisitions is one of the major
strategies. Profit is the ultimate objective of any organisation so it doesn’t matter which
strategy is employed as long as it works towards profit maximization.

Mergers and Acquisitions
Uhlenbruck et al, (2015) argued that growth is important for any organisation, growth is
actually one of the major points to measure success of any business. The different growth
strategies employed are sometimes not successful in terms of creation of value. Not all
growth strategies create value thus not improving a firm’s performance. Howson, 2017
further argued that sustainability of a growth strategy initially implemented determines the
organizations performances in the long run (Howson, 2017). A company should choose a
growth strategy that is best suitable for them considering competitors and the market
framework.
Overview of Corporate M&A in the UAE
In the year 2015 a new commercial company law was enacted in the United Arab Emirates
and a bankruptcy law in 2016 during this time the economy had significantly improved due to
rise in fuel prices (Bonaime, et al, 2018). In order to diversify dependency from fuel the
United Arab Emirates encouraged Merger and acquisition activities especially in health care,
retail industry and education. Companies registered under the free zones also known as on
shore companies are regulated by commercial company laws, part 7 of the commercial law
states out transformation, merger and acquisition rules. Apart from financial and corporate
legislation specific rules to certain sectors impact the merger and acquisition activities.
Conclusion
Diverse firms implement mergers and acquisition as an expansion strategy. Mergers cut costs,
expand operations, create synergies and economies of scale. Mergers and acquisitions come
in different types; investors should therefore be careful when selecting the most suitable to
implement. Mergers are critical change instruments and a key element of any business
strategy. With the current market trends, it is clear that business is evolving, firms should
therefore ensure to adopt the most favorable strategy for survival.

Mergers and Acquisitions
The various regulations, statues and treaty obligations that cover take over and merger
activities in the United Arab Emirates are encompassing and cover each type of transaction.
In any given market the activity level proves or disapproves the efficiency of the legal system
governing the area, the level of activity is likely to be high if the governing rules foster
growth. In the United Arab Emirates, the market is growing steadily with regards to mergers
and acquisitions which can be attributed to efficiency of regulations as well as an enabling
environment.

Mergers and Acquisitions
References
Arikan, A.M. and Stulz, R.M., 2016. Corporate acquisitions, diversification, and the firm's
life cycle. The Journal of Finance, 71(1), pp.139-194.
Bonaime, A., Gulen, H. and Ion, M., 2018. Does policy uncertainty affect mergers and
acquisitions?. Journal of Financial Economics, 129(3), pp.531-558.
Howson, P., 2017. Due diligence: The critical stage in mergers and acquisitions. Routledge.
Lebedev, S., Peng, M.W., Xie, E. and Stevens, C.E., 2015. Mergers and acquisitions in and
out of emerging economies. Journal of World Business, 50(4), pp.651-662.
Masulis, R.W. and Simsir, S.A., 2018. Deal initiation in mergers and acquisitions. Journal of
Financial and Quantitative Analysis, 53(6), pp.2389-2430.
Pelov, S. and Nguyen, H.H., 2018. Distressed Mergers and Acquisitions.
Uhlenbruck, K., Hughes-Morgan, M., Hitt, M.A., Ferrier, W.J. and Brymer, R., 2017. Rivals’
reactions to mergers and acquisitions. Strategic Organization, 15(1), pp.40-66.
Wu, C.H. and Chiang, H.E., 2019. Impact of Diversified Mergers and Acquisitions on
Corporate Risk. Journal of Economics, 15(1), pp.93-115.