Hopes that 2009 would be a good year for domestic mergers and acquisitions in the Gulf have proved unfounded to the disappointment of many underemployed bankers who moved to the region during the past half-decade.

M&A work was a priority for many investment banks that set up or expanded offices in the region before the financial crisis, as they expected foreign investments by sovereign wealth funds and, particularly, local deals.

Bankers then predicted the economic downturn would reinforce the case for corporate consolidation, and regional private equity businesses would seek to take advantage of lower prices. Instead, apart from outbound investments by sovereign funds and some restructuring, M&A advisory work has dwindled.

Theres a lot less activity than people anticipated, says Scott Campbell, a partner and M&A expert at Linklaters in Dubai. There is a lack of cash for acquisitions, and people are still reticent and waiting on the sidelines.

According to Dealogic, the volume of announced Gulf-targeted M&A deals fell to $11.3bn last year, from $13.2bn in 2008 and a peak of $34.7bn in 2007 when Dubai announced a blockbuster $11.2bn merger of two of its banks, Emirates Bank International and National Bank of Dubai.

Indeed, there have been fewer deals than Dealogics headline 2009 figure indicates. The information providers data includes deals such as Kuwait Investment Authoritys bail-out of Gulf Bank; the start-up funding of Fajr Capital, an Islamic investment house; and Commercial Bank of Qatars sale of its equity portfolio to the countrys sovereign wealth fund.

Nevertheless, there isnt a complete standstill, stresses Yann Pavie, chief executive of Gulf Merger, a Kuwait-based advisory boutique. There have been a number of smaller deals that arent that visible.

In Qatar in particular, government encouragement has spurred some consolidation. Qatar Shipping and Qatar Navigation are expected to finalise a merger soon, and Barwa Real Estate recently completed its merger with Qatar Real Estate Investment Company (Alaqaria).

Yet M&A activity in the Gulf continues to be stymied by a number of political, cultural, legal and financial obstacles.

First, M&A work has declined globally in the face of the economic downturn, and the reluctance of banks to lend for acquisitions and the Gulf is no exception.

Second, despite long-standing vows to improve and update financial regulation, the region still largely lacks a suitable legal framework for takeovers or mergers, even friendly ones.

For example, in most Gulf states company law stipulates that share sales have to be offered to existing shareholders first, complicating any friendly stake sales. Several recent deals have instead been completed by companies selling convertible bonds to suitors. Yet this solution is far from ideal and has led to several disputes in the past two years when prospective acquirers have attempted to back out of the deal.

There is often a lot of time between the acquisition and the conversion, and thats when issues can arise, says Mr Campbell. There can be uncertainties and ambiguities, even with a mandatory convertible bond, and thats a risk.

Lastly, M&A is still a sensitive subject in the Gulf. Family shareholders remain reluctant to relinquish control of even peripheral company assets, and governments are rarely under pressure to sell stakes in state-owned companies.

Mr Pavie expects more M&A deals to emerge in 2010, led by private equity outfits, but he remains doubtful that a rash of mergers will emerge despite the financial troubles of many companies.

Consolidation isnt really on the agenda. Two bad apples dont make a good apple, he observes.