As the fragile global economic recovery picks up momentum, many GCC companies are emerging from the downturn in a strong competitive position: they are cash-rich. Even at the height of the worldwide financial crisis, the top companies on the Dubai Financial Market, Abu Dhabi Securities Exchange and NASDAQ Dubai were sitting on a cash pile that totalled US$578 billion (Dh2.12 trillion) last year. This spells good news for GCC banks whose relatively unleveraged balanced sheets put them in a position to both give support to and grow with the region's consumers and businesses.

The competition will be stiff, however, as financial institutions in the region race to achieve the scale and breadth required of market leaders. Mergers and acquisitions are one path to realising greater economies of scale and expanding into attractive business lines that are still nascent in the region, such as asset management, investment banking and private wealth management.

The merger of Emirates Bank International (EBI) and National Bank of Dubai (NBD) to create one of the Middle East's largest lenders is perhaps the most dramatic example of merger activity that has gained momentum in other regions and is a sign of things to come in the GCC. Encouraged by the Dubai Government, the merger created a banking powerhouse with assets of Dh165bn, combining EBI's strong branding and large retail presence with NBD's strength in corporate banking.

Deals made during turbulent periods often are top performers. The global consultancy Bain & Company recently analysed 24,000-plus transactions from 1996 to 2006—a period that saw the Asian currency crises and a global downturn. This analysis shows acquisitions completed during or just after the 2001-2002 recession generated almost triple the excess returns of acquisitions made during the preceding boom years. Excess returns refer to shareholder returns from four weeks before to four weeks after the deal, compared with peers.

This was true regardless of industry or deal size. Meanwhile, many companies are also getting better at mergers and acquisitions. In 1995, about 50 per cent of US mergers underperformed their industry index. Ten years later, the figure was about 30 per cent. That fall may have been due to a growing number of more experienced, frequent acquirers and an increasing use of cash—instead of stock—to finance deals, which seems to encourage better due diligence and more realistic prices. Seasoned acquirers know the non-recurring costs of acquisition and integration can be very high, a consideration that they factor into deal pricing.

Even when deals are strategically sound, many fail to live up to expectations. Often, the fault lies in post-merger integration missteps. Many acquirers forfeit large amounts of value by failing to execute in three key areas. One is defining and hitting the right targets. The failure to define a deal's investment thesis—and risks—in crystal-clear terms shows there are no clear integration priorities, leading to missed targets. Understanding whether deals are to boost "scope" or "scale" is vital. Scope deals require fostering some capabilities of the acquired company and integrating where it matters most. By contrast, scale deals focus on combining two similar companies for maximum efficiency.

A second area revolves around the fact that merging large, complex organisations requires a skilful integration plan to deliver the full benefits of the deal's scope (new markets and product offerings) and scale (combining back-office operations). On the back end, acquirers need to put in place a fast and efficient process to aggressively reduce costs by consolidating IT, customer-service call centres and clerical work. Front-end integration is just as tricky and no less important but requires different competencies: the key is striking the right balance between carefully preserving client relationships while also optimising the product mix, distribution channels and pricing.

The third crucial area is retaining vital people. When it comes to HR issues, many companies delay organisational and leadership decisions. In the interim, pivotal personnel are at risk of being hired away by rivals. Experienced acquirers earn a reputation for retaining the best people—and creating opportunities for them. Doing so requires identifying talent early, making sure the organisation is appropriately mapped to the needs of the business and empowering the top employees to lead both the business and the integration process.

As well as these areas, linking integration to the business is of vital concern. Poor performance in the core business occurs when integration soaks up too much energy or drags on, distracting managers from the core business. Typically, at least 90 per cent of the organisation should be focused on its core, with clear targets and incentives to keep those businesses humming. The 10 per cent that is focused on integration needs to be tuned in and adaptive to the needs of the business.

Veteran acquirers have the best track record for avoiding these missteps. Our studies show that frequent acquirers consistently outperform infrequent acquirers by getting the integration process right and making it a core competency. If you had invested $1 in each group, the returns from the frequent-acquirer group would be 25 per cent greater than the infrequent group over a 20-year period. Recognising that experience yields results, companies lacking the former often hire experienced resources to help them execute the integration process.

Meanwhile, our research has found that as cross-border deals increase, their rate of success is similar to domestic deals but integration typically is more complex. Among the unique challenges are: tailoring the integration thesis to each region's circumstances; quickly tackling actual and perceived cultural differences; accounting for geographically dispersed operations and stakeholders as well as complex legal and regulatory frameworks that can derail integration.

With cash-rich banks and relatively low regulatory barriers, we expect the pace of consolidation to increase across the spectrum of GCC financial institutions, especially among retail banks, brokerage houses and asset managers. Consolidation will strengthen the breadth and depth of the industry regionally and afford top players the scale and competencies needed to become pan-MENA operations.

Regional economies are back on a growth trajectory and now is the time to trim non-core assets and position for greater scale and sophistication. While economic growth can erase many post-merger missteps, the winning institutions will be those that work quickly and effectively to ensure smart acquisitions live up to their potential.

Julien Faye and Philippe De Backer are partners in the Financial Services practice for Bain & Company's Dubai office.