Mergers and Acquisitions Continue, but Under New Rules

'When one person’s darkness falls, another’s dawn breaks' is a well-known saying that applies in every cycle of economic crisis. Unlike previous economic crises, the crisis caused by the coronavirus has its specificities. Market sectors that usually resisted negative global financial trends were blocked. All of this directly reflected on the mergers and acquisitions (M&A) sector, whose first half of 2020 was certainly atypical. In terms of the number of transactions and their value, the M&A sector had a very good first quarter, while the second quarter was strongly influenced by the COVID – 19 global crisis.

Sectorally speaking, more or less nothing has changed in the attractiveness of niches in the Croatian market, but transactions will be conducted according to slightly different rules.

– In Deloitte’s seventh report on Trends in M&A Activities for 2020, we surveyed a thousand executives from corporations and private equity investors about their activities and expectations for the next 12 months. The expectation is that the dynamics of mergers and acquisitions will continue, which we have also noticed in Croatia through the number of requests from domestic and international investors for due diligence services. However, the duration of due diligence as well as negotiations have now been extended to better study the impact of the pandemic on business, mitigate possible risks, and identify opportunities that may arise through the innovation of new products or new acquisitions – explains Vedrana Jelušić Kašić, partner and financial advisor at Deloitte Croatia.   

Andrej Garofulić, a partner at Mazars Croatia says that financial instability has highlighted the weaknesses in the balance sheets of typical Croatian entrepreneurs (especially in the SME segment), which is why it is expected that some entrepreneurs will think more intensively about exiting the business.

– What currently prevents the more intense emergence of this problem is certainly significant liquidity in the market, as well as government measures that have helped to navigate the COVID – 19 crisis so far – believes Garofulić.

At the same time, he adds, buyers from the sector (so-called strategic investors) are seeking growth through acquisitions as the markets they operate in are often saturated, while financial investors (private equity, pension funds, etc.) are looking for returns either through consolidation and then sale or through dividends. Both segments are active as there is enough money available for acquisitions.

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—Although it may initially seem that mostly foreigners are acquiring domestic companies, according to Mazars’ 2019 report, out of 22 acquisitions last year, as many as nine were made by Croatian companies. Additionally, with the emergence of the COVID-19 virus, funds temporarily reduced the volume of new investments in the region, focusing on controlling and optimizing the operations of portfolio companies.

Tomislav Boban, assistant director at IMAP South East Europe pointed out another trend affecting the M&A market, which is changes within global supply chains.

– Difficult logistics and changes within global supply chains in recent months have prompted companies that do not have a physical presence in Europe to acquire European companies. Within IMAP, we see increasing interest from companies in India, China, Turkey, and other Eastern countries that are seeking to increase the flexibility of supply chains in the European market by acquiring regional companies while simultaneously expanding their client base. Croatian and Slovenian companies are interesting to them as they can use them as a production base and platform for further expansion within the EU – says Boban. 

Due to low interest rates and government support to cover costs and preserve jobs, the achieved values in the market in the first and second quarters of 2020 were still high, and business owners have not fully aligned their expectations according to the current crisis.

– The imbalance between owners’ expectations and the price that strategic and financial investors are willing to pay, which would reflect the increase in risk, will also negatively impact the number of new M&A transactions in Europe – believes Boban.

It is important for company owners not to panic, to remain bold and consistent, as there is an army of consultants outside who are used to working under such stressful and economically uncertain circumstances. At this moment, they can make an excellent, but also a disastrous business deal for you.

For additional analyses and trends in the M&A market by specific sectors and concrete examples of mergers and acquisitions, read in the new printed and digital edition of Lider.

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