M&A activity, dented by financial crisis

M&A market in Romania recorded 46 deals in first three months this year, totaling 631.55 mln euros, down 82% from prior-year period, DealWatch informs.

The number of mergers and acquisitions in the local landscape sank 22% from first quarter 2008, DealWatch research found.

“We counted fewer transactions. We think that certain transactions in 2008 that were announced in early 2009, and it is possible the rumored transactions to be included in the counting. Anyway, the number of rumored transactions is not the essential difference compared to our research, but their size”, Ioana Filipescu (photo), managing director of Raiffeisen Investment Romania, told Wall-Street.

For the moment, there are no deals involving distressed companies and impaired assets, as vendors need to take time to get used to this type of deals. “Either way, the lion’s share of the deals reported in first quarter 2009 were initiated in 2008, most likely before September 15, the day Lehman Brothers collapsed”, said Filipescu.

Raiffeisen Investment research found that the first quarter of 2009 had seen a roughly 90% contraction of the market value, corresponding to a 20% decline in number of deals, versus prior-year period. “M&A activity continues to be highly influenced by the financial-economic crisis, apart from few sectors with high growth potential”, Ioana Filipescu added.

She refers especially to health services, technology, food industry, and other sectors that are expected to remain stable - such as telecommunication, pharma, and other sub-fields in energy industry – most of the deals will involve small amounts and distressed companies.

“Reasonable or not, the deals closed in previous years involved significantly higher amounts, expressed in multiples of EBITDA, than what we are about to see from now on”, Filipescu said.

Q1, most difficult of this year

The number of deals closed or announced last year stood at 265, by 2 more than 2007, their collective value increasing by 17.68%, up to 6.81 bln euros.

Thus, Romania remained the seventh most attractive investment destination among emerging companies in 2008 with China (1,393 deals), Russia (1,333 deals), Brasil (609) and India (540) taking the leading spots.

Of al the 46 deals announced by DealWatch for the first quarter 2009, very few of them involved distressed assets, investment bankers say.

“I am not familiar with the whole list, but I would be surprised to see speculative or distressed assets deals”.

“Most of the transactions were initiated in the second half of last year – the times of fast-paced deals are long gone”, Doru Lionachescu, partner at Capital Partners told Wall-Street.

Lionachescu, one of the renowned investment bankers of Romania observed how the M&A practice market vanished into thin air in first quarter, as well as financial market’s adjacent sectors – a sharper contraction than we had expected in fall. The deals however fail to complete – we see buyers putting off the completion of a deal, on country-related macroeconomic reasons. I hope this was the most difficult quarter of 2009, and the market will recover through the year-end.

“It is much more important what you buy than how much you pay

As Ciprian Paltineanu noted, one of the effects of the financial crisis is that price expectations of Romanian entrepreneurs, blamed in the past as being one of the reasons for major deals moving on deep freeze, have started to decrease. “Nevertheless, it is more important to see that gaps between vendors’ valuations (most of the times based on emotional criteria) and of potential buyers, are still out there. Buyers react by properly reducing the target prices. It’s a dynamic process, that can bounce back as well as it can deepen”, Paltineanu stated.

Last year, the manager had expected to see deals at a significantly lower value, on a narrow appetite for investments and company valuations set at bargain selling prices. “These expectations are backed by market analyses, bearing in mind that the exact magnitude of the market is difficult to gauge”, said Ciprian Paltineanu, the head of UniCredit CA IB Romania.

Last year, he was saying that the dried up global liquidity and the generalized state of mistrust in the various forms of investment will pave the way to an acute prudent approach to investments, restriction of the access to financing sources and the reduction of evaluation values of assets and of target companies’ values accordingly.

All these characteristics of the global economies remain valid realities that would mostly affect emerging economies, deemed by investors as risky investment destinations.