Egypt’s Startup Scene Transforms Amid New M&A Trends

May 14, 2022


Egypt’s diverse economy and young population have always driven its innovation landscape. That is evident as the country consistently ranked among the top two destinations for mergers and acquisitions (M&A) in the Middle East and Africa. 

The advent of the pandemic further opened up such opportunities, as lockdowns meant that people needed new innovative solutions to accommodate their new routines.  

International M&A investors are seeing massive opportunities in such a boom. For example, Egypt’s SWVL listing on the NASDAQ in July made it the region’s second startup valued at over $1 billion, showing how far those investors could take lucrative startups. 

Accordingly, understanding their post-pandemic mentality and priorities and catering to that would ensure Egypt retains its status as an M&A hotbed.  

Egypt’s M&A boom 

Global law firm Baker McKenzie reported that Egypt saw 111 M&A transactions worth $4 billion during the first half (H1) of 2021, compared to 74 transactions worth $906 million during H1 2020 — a 50% year-on-year jump in the number of deals and 342% increase by value. 

Domestic and overseas investors showed almost equal interest in Egypt: The former secured 59 deals during H1 2021, up 40% year on year, while overseas investors closed 52 contracts, up 62.5% during the same period. In terms of value, international deals topped $2.8 billion in H1 2021, up almost 278% year on year, while local transactions’ value shot up 925% to $1.6 billion.

In comparison, Baker McKenzie reported that while the MENA region saw its number of deals increase by 59% in H1 2021 compared to H1 2020, valuations in the region decreased by 7%. Globally, the number of M&A deals increased by 120%, while their value jumped 22% from H1 2020 to H1 2021. 

Egypt’s most attractive sector so far in 2021 is the non-banking financial sector with 10 deals, followed by healthcare with six agreements. By value, those sectors swapped places: Healthcare M&A transaction values were more than double that of financial services contracts. 

The 2020/21 market

M&A activity was equally influenced by the pandemic, governments’ policies and successes in combating it, and recovery strategies since March 2020. In September, the U.S.-based accounting firm EisnerAmper assembled an expert panel to assess M&A trends over the past two years. They said M&A deals during the first quarter (Q1) 2020 were unclosed high-value deals from 2019, and valuations “stayed high” in Q2 as lockdowns meant no new opportunities. 

By Q3 2020, volumes increased as companies adapted to the pandemic, but the panel noted that values declined, indicating more low-quality deals. The quality of available M&A deals improved in Q4 2020, resulting in rising valuations as volumes retained their momentum, albeit still below pre-pandemic levels. 

During H1 2021, the gap between “high-quality and low-quality deals” was widening, with lucrative companies commanding a “significant premium” as spreads became “more competitive,” noted the panelists.  

The EisnerAmper panel noted that this year, investors are more interested in larger M&A deals than in 2020, with a preference for companies with high margins. They should also solve local problems rather than promising world-dominating products or services. 

Fueling those M&A trends is the fact that investors have the money to spend on potentially lucrative deals. “Private equity fundraising has been brisk, and with more than $1.9 trillion of [committed but unallocated cash], its buying power … has never been higher,” noted PricewaterhouseCoopers (PwC) mid-year update.   

PwC also noted the rising popularity of special purpose acquisition companies (SPAC), listed shell firms that acquire unlisted startups since 2020, raising $500 billion in new M&A deals.  

Looking to 2022

The PwC update noted that macroeconomic concerns, inflation, geopolitics, and regulations, are less critical in 2021 than before the pandemic. “[Business leaders] appear to have a clearer vision … and a sharper focus on M&A strategies to accelerate growth, gain scale, and digitize to reshape [the] business,” noted the PwC paper. The exception is interest rates, which “are being carefully watched.” 

However, companies won’t have a “best practices” playbook to follow, as the market is still in a trial-and-error stage responding to developments with COVID-19. “Businesses are navigating a patchwork of conflicting guidance and best practices,” noted Bloomberg. That would affect the consistency and predictability of income inflows.

EisnerAmper’s panelists highlighted new legislative considerations after the G7 agreed to a 15% global minimum corporate tax rate in June. They also raised concerns over the departure of top executives from target companies after signing the M&A deal, in line with more employees leaving their jobs in 2021.

Also, the PwC update for 2022 predicts that private equity firms will compete fiercely with SPACs for lucrative M&A deals across all sectors.  

Overall, the EisnerAmper panel believes that the M&A market would continue to be a “sellers’ market” for the companies that meet the buyers’ criteria. “There is a growing understanding among business leaders [that paying] more for revenue synergies [would] fuel long-term growth.”