Article: Can Pakistan really develop a deal-making culture?

It’s true that the M&A landscape in Pakistan has evolved fast in the recent years. At the same time, the volume and value of deals are below the potential size represented by Pakistan as a nation and its growing economy. Should Pakistan - and other Frontier Markets for that question - fulfil its full potential, the market could see tens of deals representing hundreds of millions of dollars each year.

So, what’s holding Pakistan back?

Most observers will focus on the role of the Government in investment incentives, foreign exchange, and industrial policies. These are definitely critical elements, but an equally important aspect that is often neglected in the public debate is that the culture of deal-making needs to evolve substantially as well.

The Pakistani business culture has been traditionally based on trust and on long-term relationships. This is important for finding suppliers one can trust, hiring a manager to run a plant, or even in disbursing bank loans. In deal-making, hoping to build the same level of trust over the long-term may not be the best approach as capital investment follows a different timetable. This is especially the case if the capital providers are foreign.

We’ve found that a different set of behaviors and practices are important for the conclusion of deals:

Pragmatism vs. idealism

The negotiation process allows both parties to discover what can be traded off against what. Working together to find a common ground where everyone is somewhat satisfied and somewhat dissatisfied is key for a successful outcome. No deal will be made without concessions from all parties involved. Entering a negotiation hoping that all preliminary conditions will be met is rarely beneficial to making a deal.

Fairness

Playing fair with the other party throughout the negotiation process establishes trust. This doesn’t mean compromising on one’s non-negotiable items, but rather is a mindset of not leveraging one’s position into coercing the other into submission. The goodwill from being fair - and communicating this to the other party - can get deals closed.

Limiting the downside for all parties

Incorporating items that limit the downside for each party in case the negotiation fails is important to build confidence. This is even more important if the relationship between the negotiating parties is recent. Insisting on this principle does not mean that you want the negotiation to fail, just like having a car insurance doesn’t mean you would like to end up in a car crash. Limiting the downside allow parties to be more creative in finding a deal.

Put your money where your mouth is

Having strong beliefs - but not being able to back them up - doesn’t help build trust. If for example you’re seeking investment and you strongly believe that your company will double its revenues next year, you should be able to accept a structure where you receive higher valuation next year after the doubling of the revenues. When words and behaviors do not match, investors lose interest fast.

It is true that some regions and countries have the DNA for successful deal making embedded into their business cultures and some do not. Our view is that Pakistani businesses (especially the family businesses) need to add these practices into their toolkit to support the economic growth and generate additional wealth for the next generation of entrepreneurs.

These principles are not a panacea for success, but they do support deal-making.

Because ‘no deal’ means everyone loses, but the biggest loser is the country, and investment into Pakistan’s economy.