Merger and Acquisition Synergy Analysis in the UAE

When it comes to mergers and acquisitions, valuation is hardly the book that determines whether a transaction will or will not succeed. Most of the M and A transactions fail or do not work successfully after they are complete based on the fact that there is misalignment among the merging organizations in relation to their strategy, operations, governing structure and legal structure. This is often the failure of synergy analysis.

The UAE has a controlled and fast developing business climate where synergy analysis is a decisive factor on whether a deal will result in sustainable value, or one that will place the parties involved in a legal, operational, and regulatory risk. An organized synergy study enables the stakeholders to assess the capability of the resulting product to operate effectively, legally, and profitability to the UAE laws and regulations.

What Is Synergy Analysis of M&A?

Synergy analysis is a pre-merger analysis applied in the evaluation of a business to determine whether there will be any quantifiable benefits that will come about as a result of the merger of two businesses that are not in operation. These advantages can be strategic, operational, financial or legal.

The synergy analysis should also consider in the UAE context:

• Corporate and ownership limitations

• Regulatory compatibility to licensing

• Implication of free zone and mainland

• Labour law exposure and employment

• Legal and taxation cross-border issues

Synergy analysis is a risk-oriented analysis as opposed to due diligence, which is mainly risk-oriented.

M&A Synergies types that are being evaluated in the UAE

Strategic Synergy

Strategic synergy determines whether the transaction is aligned with long term business goals like expansion into the market, diversification, consolidation of the sector or positioning regarding the regulations. This step tends to be overlapping with target screening, where potential targets of acquisition are analyzed on strategic fit, fit with sector, ownership structure, and regulatory limitations in the UAE law.

In the absence of good target screening, companies are likely to get into an acquisition that is structurally incompatible or strategically misaligned and therefore in the post transaction inefficiencies.

Operational Synergy

Operational synergy dwells on the ability of the internal operations, management structures, systems and processes of both entities to be integrated effectively. The operational compatibility in the UAE is strictly connected with the requirements of the licensing, business which may be conducted with the help of the trade licences, and sectoral approvals.

The operational synergy has to be backed with proper deal structuring because the legal form of the transaction has a direct influence on the transfer of the liability, regulatory approvals, and integration of the merger. The decision to purchase shares, assets, or have a merger has great consequences on continuity and compliance of operations.

Financial Synergy

Financial synergy analyses cost efficiencies, increase in revenue, capital optimisation and tax efficiency that are brought about by the transaction. This analysis should be done with regards to the corporate tax implications, transfer pricing exposure and transfer structuring requirements in UAE especially to bodies that operate in various jurisdictions or free zones.

Legal and Regulatory Synergy

Legal synergy is one such most important but neglected ratio of synergy analysis. It analyses the compatibility of the legal frameworks, the governing structures, and the compliance requirements of the two organizations.

The legal synergy analysis normally looks at:

• Shareholders and corporate governance

• Continuity and regulatory approvals in licensing

• Current contract, change-of-control agreements

• History of litigation and regulatory research

• Workforce and integration of employment law

The absence of legal synergy may slow down the completion, cause regulatory violations, or cause a post-closing conflict.

M&A Readiness role in Synergy Analysis

Synergy research works best when it is performed in conjunction with an M&A readiness review. A readiness review is a proactive consultation that a seller or target company does to determine legal, structural and compliance flaws prior to getting into the negotiating table.

As in the UAE, readiness reviews are significant in relation to:

• Family-owned businesses

• Regulated entities

• Firms having old compliance problems

• Companies intending to invest abroad or move out

A readiness exercise reinforces the analysis of synergy by making sure that the synergies identified are realistic and that they are not brought down by any unresolved legal or regulatory concern.

Comparison of Synergy Analysis and Due Diligence

Even though they are the same issue, the purpose of synergy analysis and due diligence is different.

Synergy analysis focuses on:

• Future value creation

• Integration feasibility

• Operational alignment and strategic alignment

In comparison, legal due diligence confirms the assumptions used in the synergy analysis by analyzing the target legal, financial and operation position. Due diligence In UAE M&A transactions, due diligence usually includes:

• Company documents and history of ownership

• Licensing and regulatory authorizations

• Material contracts and liabilities

• Labour and employment law exposure

• Controversies, enquiries, and contingent liabilities

The only situation that can ensure that a transaction is safe is when there is consistency in the findings of the synergy analysis and due diligence.

The reason why Synergy Analysis is important in the UAE

Being a regional investment hub, the UAE is prone to cross-border aspects, the multiple regulators, and the changing legal frameworks in M&A transactions. Businesses risk more by not having structured analysis of synergy, which involves:

• Regulatory non-compliance

• Integration failure

• Post-transaction disputes

• Unexpected liabilities

• Waste value after completion

The synergy analysis gives the decision-makers some realistic perspective on the possibility of a transaction being viable in law, operationally feasible and strategic.

Risks that are typically uncovered as a result of ineffective Synergy Analysis

• Business or incompatible licensing

• Competing shareholder or governance systems

• Unnoticed regulatory approvals or consent requirements

• Liabilities in employment law in transfer of workforce

• Contractual limitations that occur as a response to change of control

The early identification of such issues enables parties to restructure the deal, renegotiate or withdraw without the huge costs.

Conclusion

One of the pillars of a successful M&A in the UAE is the synergy analysis. It helps to fill the gap between strategic ambition and legal reality, as it measures the possibility of the businesses to integrate within the regulatory and commercial environment of the UAE.

In combination with target screening, a balanced deal structuring, strengthened with an M&A readiness review, and approved with a detailed due diligence, synergy analysis is an effective risk mitigation and sustainable value creation tool.

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