As the Middle East witnesses something of a resurgence in activity levels, Grant Murgatroyd speaks to local lawyers about how the market has been reshaped by a period of retrenchment

Dubai's detractors have had a field day in recent years. The wise man, they pointed out, did not build his house upon the sand. From its heyday in the 2000s, doomsayers forecast the city would collapse and be swallowed up by the desert.

That has not happened and, after a painful retrenchment, the Middle East's leading hub is back on the path to growth.

With the opening of Terminal 3, Dubai's airport expects 75 million international passengers in 2013, rising to 90 million in 2015. This would catapult it into the lead as the world's busiest airport, dwarfing its closest rivals London Heathrow (65 million), Paris Charles De Gaulle (56 million) and Hong Kong's Chek Lap Kok (53 million).

dubai-compostie-master-1-webThe MENA (Middle East & North Africa) region is home to roughly 400 million people – more than the US – with more than half of them under the age of 24. Historically dominated by the natural resource sector, businesses are increasingly seeing the Middle East as a vibrant consumer market in its own right.

On top of its domestic attractiveness, the region also sits at a geographic crossroads between east and west, with many multinational companies choosing it as headquarters for their operations in the high growth-potential markets of South Asia and Africa. In all, as much as two thirds of the world's population is within a four-hour flight from Dubai.

Sarosh Mewawalla, managing partner at Linklaters in the Middle East, says: "Activity is coming back for M&A in the Middle East. We are seeing more outbound transactions and more within the region.

"There is a significant amount of property activity, as you would expect with property markets in Europe and the US where they are. But there is also outbound investment into industrials from a combination of sovereign wealth funds, family offices and industrial corporations who are doing joint ventures."

The value of M&A transactions in the Middle East soared in the 12 months to 31 January this year, with £14.1bn of deals reported, compared to £5.8bn in the preceding 12-month period, according to data from mergermarket.

"We are seeing a lot of activity centred in Dubai and also in Saudi Arabia," says Gary Watts, head of corporate commercial at Al Tamimi & Company.

"M&A activity levels seem to be moving in tandem with the global equity markets, with confidence gradually returning, the US election being settled and eurozone fears receding."

Competitive landscape

The optimistic view is borne out by a Legal Week survey of law firms in the region, with three quarters of firms surveyed saying they planned to increase investment.

Shane Morton, partner at legal recruitment specialist Taylor Root, says: "You didn't find firms closing their doors out here [when then downturn hit]. Law firms are savvy enough to know where the opportunities are and that things will come back.

"They might have laid a few people off, like they did in London, New York and everywhere else. But they know this is a growth area and if they closed their doors, they would shut themselves off to opportunities when the market came back."

However, competition among law firms in the region is intense and many are not making any money. Amjad Ali Khan, managing partner of Dubai firm Afridi & Angell, says: "The number of lawyers has gone down quite substantially, with several hundred fewer practising now than a few years ago, but it is still very competitive.

"It is healthier, though we find that the multinational law firms are competing aggressively and have the ability to undercut anyone in the market.

"The change we noticed in the past three years is that the multinational firms are moving into the United Arab Emirates (UAE) law transactions area and are competing hard because there are not enough of the mega transactions to keep them busy, so they have shifted their focus and are going for UAE transactions."

rob-morris-habib-al-mulla-webHow long the status quo can be maintained is a matter for debate. Rob Morris (pictured), chief executive officer at UAE firm Habib Al Mulla, says: "The market is saturated with law firms and that is the biggest challenge because there is only so much work to go around. This is creating a huge amount of competition, with people dumping prices just to win the case.

"We are expecting some of those law firms will start to retrench and go back home, especially some of the mid-tier internationals that came over during the boom."

For their part, the big firms argue that they are beneficiaries of a flight to quality. Mewawalla says: "We have seen gravitation towards the quality end of the spectrum.

"We see more people phoning us who might have been focused on price, but now are more focused on quality. People are becoming more risk conscious and want to make sure that they have properly identified the risks and that is something the premium end of the legal spectrum are good at."

Sector spread

Allen & Overy (A&O) recently advised Societe Generale and BNP Paribas on the sale of their respective banking businesses in Egypt.

As with most transactions in the increasingly busy banking and finance sector, the sales were driven by the need of parent companies to raise capital and strengthen their balance sheets, rather than any domestic rationale.

"We've seen some very significant transactions not only being announced, but also really happening," says Andrew Schoorlemmer, partner and head of the Middle East corporate team at A&O.

"This is why I would regard the mood of one of cautious optimism, rather than pure optimism. I don't think the reasons for a significant number of deals getting done are entirely positive.

"These are not the really bullish reasons for deals getting done that we have seen in the past, but law firms like ours, with strength in depth – in both corporate and restructuring – have continued to thrive, notwithstanding the recent political instability in our region."

The technology, media and telecommunications sector is also attracting the interest of the big global players who are having to compete ferociously in their own home markets.

In the Middle East, particularly in those demographics that are untapped, much of the television and other media content being produced is of low quality, and international groups see great opportunity.

In 2012, News Corporation took a 19% strategic stake in Rotana Holdings, which operates one of the largest TV networks and advertising sales operations in the region and owns the largest Arabic film library.

pervez-akhtar-freshfields-webReal estate is, meanwhile, enjoying something of a mini-boom. "The economy, the market and the morale is generally on an upswing," says Ali Khan.

"The impact of the Arab Spring on the economy is one of the reasons. The real estate has gone low enough that it is time to recover, and generally people have short memories. Prices only need to go up a little and people get into a mode to invest and do business."

It is, of course, easier for smaller markets to rebound than the leading global centres such as London and New York. It only takes a few headline deals to make the numbers look brighter.

"What you don't have is the sustained volume pipeline of deals that you get in more developed markets," says Pervez Akhtar, regional managing partner for MENA at Freshfields Bruckhaus Deringer.

"The region has always been more opportunistic – with lower visibility of what deals will happen next or come to fruition than other mature markets – because people can be more reactive in fast-changing circumstances.

"The market has matured, but you have to be nimble and responsive."

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Turning the corner?

Firms are more optimistic about the Middle East than they have been for a number of years, with 35% of firms operating in the region surveyed by Legal Week expecting to increase investment in their firm "a lot" and a further 40% saying they would increase investment "a little".

Just 5% were planning to decrease, with 20% maintaining investment levels. Aside from the established centres of Dubai and Abu Dhabi, investment is being targeted at Saudi Arabia and Qatar.

"Legal recruitment in the Middle East has started to pick up, driven in part by the significant levels of infrastructure investment in countries like Saudi Arabia, Qatar and Kuwait and the resurgence of Dubai," says Husam Hourani, managing partner of Al Tamimi & Company.

"The picture remains somewhat fragmented with more cautious levels of growth among commercial law firms and some ongoing restructuring at one or two of the international firms where business levels, particularly on the corporate commercial side, remain adversely affected by the global downturn."

Firms are targeting a broad range of sectors, with construction still proving the most active sector according to respondents, followed by energy & utilities. Both of these areas have long proved fertile hunting ground for law firms, alongside sectors such as real estate, leisure, hotels and food as the region rapidly expands.

Interestingly, banking & finance and M&A are still proving active practice areas for firms on the ground, cited as the two most active practice areas over recent months.