Baltic M&A market – fewer transactions, more distressed buyouts

11.11.2009

Laimonas Skibarka
Co-Managing Partner
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It is no surprise that the level of mergers & acquisitions (M&A) activity in Estonia, Latvia and Lithuania has significantly decreased during the current year. This tendency is well demonstrated by the volume of deals notified to the competition authorities of the three Baltic States. As appears from the charts below (which include share deals and joint ventures notified during the first seven months of the respective years), the number of notifications has fallen significantly in 2009.

These pan-Baltic statistics correlate to general tendencies in Europe, where the volume of announced deals in Q2 2009 dropped to the level of Q2 2003 – the lowest quarter in terms of M&A transactions in recent years (Deal Drivers EMEA HY 2009 Report published by Mergermarket).

Such a drop in M&A deal volume in the Baltics is mainly caused by unstable economic conditions, lack of optimism in financial markets, high interest on loans, and general reluctance of the banks to finance acquisitions. Limited external financing has narrowed the circle of potential buyers and now only cash-rich companies may afford acquisitions. The market is dominated by strategic investors seeking to increase their market share or penetrate the Baltics as a new market, while financial investors are very rare.

Though sellers' expectations have declined significantly and the "expectation gap" has shrunk, buyers are now very aggressive and the market is clearly buyer-dominated. Such a situation is not attractive for sellers, who would rarely consider a sale even when a business is running poorly. More often, stakeholders prefer to utilise other ways of saving businesses (such as formal restructuring, or turnaround) and only think about sale if no other option works. Thus, if a business is sold, it is often a distressed buyout, which requires a special approach and specific experience.

Depending on the level of distress, a target may need fresh capital injections immediately, and may lose a lot of value if the sale process is delayed. This makes the timing for preparation and closing of the transaction crucial and extremely tight. What previously took a couple of months, in a distressed situation happens in weeks. Due to time constraints, deals also become less formal and often involve simpler schemes. Sometimes, sellers tend to easily give up representations and warranties, which are usually the toughest part in many M&A deals, and seem to care only about price and payment terms. However, this may backfire with substantial claims from buyers after closing.

Following some positive developments in major European economies, the Baltic markets are also expected to start recovering gradually. Nevertheless, it appears that distressed buyouts may continue to represent a significant part of M&A transactions in the Baltics for some time.

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