How mergers could save the property and financial sectors

Mohanad Al Wadiya, Managing Director of Harbor Real Estate Brokerage, shares his thoughts on upcoming mergers

For many players in the local market, mergers and acquisitions appear to be a logical solution to stay afloat during the global financial crisis. Opinion is divided as to whether these mergers and acquisitions will have a positive or negative impact in the short and medium terms, and it is too early at this stage to predict success or failure. Nevertheless, it seems clear that without these actions, the result would be a freeze in financing facilities and diminishing activity in the property sector, which would have an adverse effect on the overall economy.

Within the financial sector, these kinds of mergers really started as early as last year. It all began when Amlak and Tamweel announced a merger to create Emirates Development Bank in November 2008. The new bank will have access to federal funds and hopes to strengthen the UAE’s home finance sector. The merger news gained considerable media attention and created veryhigh expectations.

In terms of property development, we have seen similar mergers within the last year. Dubai World, the major property and ports conglomerate, recently consolidated its management and property operations of Leisurecorp, Dubai Maritime City, and the Dubai Multi Commodities Centre, all of which it owns. The property divisions of these companies will now be run by Nakheel, another property arm of Dubai World.

There is also continued discussion of a merger between Deyaar Development and Union Properties, with news about the latter having liquidity problems and losing its long-time chief executive recently.

While these developments are important for the sector, the most significant merger in the region is currently being discussed between Dubai Holdings’ ‘Big 3’ companies and Emaar, a most popular developer in the Middle East. Dubai Properties, Tatweer, and Sama Dubai—collectively known as ‘The Big 3’—are fully-owned subsidiariesof Dubai Holding Commercial Operations, a holding company of Dubai Holding Group with total assets of Dh126bn at the end of 2008, as quotes by Emaar.

There is a growing consensus among the officials involved that allowing healthy businesses to acquire companies in jeopardy of failing could stabilise the economy by bolstering confidence in both the financial and property sectors. For some of these companies, merging with a partner that has a strong balance sheet is a pressing and essential step in preventing dissolution. Other benefits include leveraging economies of scale and having stronger negotiation positions with regard to suppliers and contractors. The mergers will allow companies to work together to achieve long-term, strategic benefits by uniting complementary businesses into a single, sufficient and more successful operation. For the property sector, these mergers will also allow consolidated companies to have better control of the overall supply introduced into the marketplace and the quality of the products and services offered. This will definitely have a positive impact on the market in the long run.

On the other hand, there are concerns that these mergers will place heavy burdens on the stronger companies
involved. These partners are not just taking over assets, but may also be inheriting large liabilities and debts. Furthermore, these mergers are likely to generate a lot of uncertainty among the investors and shareholders involved. Investors might have to accept further delays until these mergers are finalised, and will then have to evaluate the impact of the mergers on their investment.

Whatever the impact, the number of mergers involving financial and property organisations is increasing. For these new companies, the ability to provide prompt, transparent, and practical information that guide all stakeholders through the merger process and expected outcomes could make the difference between success and failure from the public’s point of view.

Merger saga expected to continue

Lack of clarity leaves investors and shareholders anxious.

For many in the local real estate market,
mergers and acquisitions appear to be a
logical solution to stay afloat during the
global financial crisis. Opinion is divided
as to whether these moves will have a
positive — or negative — impact in the
short- and medium-term. Yet, it seems
clear that without these mergers and
acquisitions, the result would be a freeze
in financing facilities and diminishing
activity in the property sector, which
would have an adverse effect on the
overall economy.

Within the financial services sector,
the merger plays started as early as last
year. It began with Amlak and Tamweel
announcing their plans of coming together
to create an institution that would have
access to federal funds and strengthen the
country’s home finance marketplace.

When it was announced in
November last year, the possibility of
an Amlak-Tamweel joint venture gained
considerable media attention and
ratcheted up expectations.

In terms of property development,
we have seen similar plays within the
last 12 months. Dubai World, the portsto-
property conglomerate, recently
consolidated the management and
property operations of its subsidiaries,
including Leisurecorp, Dubai Maritime
City and the Dubai Multi Commodities
Centre. The property divisions of these
companies will now be run by Nakheel,
also part of the Dubai World portfolio

Rumours swirl around about a
possible alliance between Deyaar
Development and Union Properties,
stoked even higher by recent news about
the latter having liquidity problems and
losing its long-serving chief executive.

But, the most significant merger
possibility was thrown up quite recently,
with Dubai Holdings’ three real estate
arms — Dubai Properties, Tatweer, and
Sama Dubai — initiating the process to
cobble together an all-encompassing
marriage with Emaar.

Way to ward off dissolution

There is a growing consensus among
those involved in fine-tuning the process
that allowing healthy companies to
acquire those at risk of failing could
stabilise the economy and bolster
confidence in both the financial and
property sectors.

For some, merging with a partner that
has a strong balance-sheet is an essential
step in warding off dissolution. Other
spin-offs include leveraging economies
of scale and getting into stronger
negotiating positions with regard to
suppliers and contractors.

In an ideal context, mergers allow
companies to work together to achieve
long-term, strategic benefits by uniting
complementary businesses into a single,
self-sufficient and more successful
operation. When it comes to the
property sector, consolidated companies
have better control of the overall supply
introduced into the marketplace and the
quality of products and services offered.

Inheriting liabilities, debts

On the other hand, there are concerns
these mergers will place a heavy burden
on the stronger companies involved.
These partners are not just taking over
assets, but may end up inheriting large
liabilities and debts. Furthermore, the
mergers, once they are effected, are
likely to generate a lot of uncertainty
among investors and shareholders.
Investors might have to accept further
delays until these mergers are finalised.

Whatever the end result, the number of
mergers involving financial and property
organisations will only increase. For
the new entities formed thereafter, the
ability to provide prompt, transparent
and practical information could be the
benchmark for success or failure from the
public’s point of view.

The writer is the managing director of Harbor Real Estate