In spite of a substantial drop in M&A deal value in the CEE/SEE region in 2019, the mood among dealmakers remained buoyant. The vast majority of respondents to this year’s survey – some 89% – say that their experience of M&A in the CEE/SEE region has made it more likely that they’ll invest in the region again. Over two thirds of corporates surveyed (68%) and 78% of PEs surveyed say they expect to make an acquisition in the region in the next two years.
Deal volume in the region held steady at 481 deals, in contrast to Western Europe, which registered an 8% decline. And while deal value fell 17% in CEE/SEE, this was still less steep than the 23% drop in M&A value in Western Europe over the same period.
The region’s strengths are manifold. Most CEE/SEE countries are members of the European Union, the world’s largest economy, and those that aren’t are on its doorstep, with preferential trade and investment terms in many areas. Moreover, the CEE/SEE region’s economic growth has outstripped that of Western Europe for several years, and many markets remain under-penetrated and underdeveloped in sectors ranging from infrastructure to healthcare, from modern retail to tourism.
The region also boasts a remarkable pool of skilled labour in sectors ranging from automotive to software development, partly thanks to a long legacy of excellent technical education. Wages, rent, and overhead costs also tend to be below the EU average. However, rapid growth has led to wage convergence in some areas, and demographic change has led to a decrease in the size of the working age population in many countries.
In 2019, we marked the thirtieth anniversary of the end of communism in most of the region. The past three decades have seen wide-ranging reforms from privatisations to the liberalisation of labour markets, creating an environment that is increasingly business-friendly and open to investment.
Compared to many other emerging markets, most of the region also enjoys a remarkable level of political stability. While there have been snap elections and rapid changes of leadership, these have not led to radical change.
“There’s still a higher risk perception than risk reality, which allows you to command a better rate of return on your investment,” says Bryan Jardine, managing partner at Wolf Theiss Romania.
EU membership has also allowed CEE/SEE countries to tap large amounts of funding for development, mainly in real assets such as infrastructure, but also in the start-up ecosystem, where EU-backed VC and seed funds have played an important role.
Looking ahead, a small majority of respondents (51%) think that it will become more difficult to raise funds for dealmaking in CEE/SEE over the next 12 months, double the 24% who felt the same in last year’s survey. Global economic headwinds may lead to a more ‘risk-off’ stance from financial institutions and investors, while shallow regional capital markets are an ongoing challenge.
The TMT and consumer and leisure sectors are once again seen as likely hotspots of dealmaking by respondents this year, and were the most popular choices when respondents were asked to select the most important sectors where they expect to make acquisitions in 2020.
Nearly three quarters of respondents (72%) expect increased distressed debt opportunities in CEE/SEE over the coming year, up from just 15% in last year’s survey. Again, the impact of global headwinds is being felt by businesses, but policy changes and legal processes are also having an effect.
In H2 2019, Mergermarket surveyed 150 senior-level executives about their experiences and outlook on M&A in the Central Eastern European region. Half of the respondents were based in the CEE region, while the other half were drawn from outside of the region. One third of respondents were from private equity firms, with the remainder comprised of corporate respondents.
All participants in the survey had made at least one acquisition in the CEE region over the past 12 months. The survey included a combination of qualitative and quantitative questions and all interviews were conducted over the telephone by appointment. Results were analysed and collated by Mergermarket and all responses are anonymised and presented in aggregate.