In This Issue
Oct 2009Acquisition of Mid-Sized Companies in Russia: A Source for Creating Value in Economic Downturns
By: Maxim Skobtsov
The Russian M&A market has shrunk significantly over the past year. The total value of deals went down from roughly USD 100 billion in the first half of 2008 to USD 50 billion for the same period of 2009. Moreover, some three quarters of the value was related to large (over USD 250 million) deals in oil and gas, metals, and energy sectors. Not surprisingly, the plunge of the Russian M&A market has followed the global trend; most companies tend to draw away from acquisitions when the economy is weak.
At the same time, deals during recession periods may deliver greater long-term returns for buyers compared to the ones executed in favorable economic environments. For example, according to BCG research, downturn deals, on average, create 14.5% more value for shareholders of the acquirer as opposed to upturn deals. Such value is mostly derived from operational improvements leading to an increase in profitability, not from speculative exits after markets have recovered. To capitalize on these opportunities, however, a buyer must be able to identify a target that not only has an unlocked growth potential and the right strategic fit but is also prepared to enter into equity partnership by accepting realistic valuations.
Our recent observations confirm that, in Russia, many owners of mid-sized
companies, who would not even have thought about selling their businesses a year
ago, are now prepared (and in some cases forced) to seek an investor. Since
public offerings and debt financing are no longer feasible ways to attract
capital, local owners have changed their priorities toward strategic partners.
Owners expect that strategic investors can bring needed capital into equity,
share industrial expertise, and contribute to the operational and technological
advantage of the company.
Obviously, not every mid-sized Russian company represents a value-creating opportunity, especially in a downturn environment. Success largely depends on the financial health of the target company, its resources, transparency, strategic plans, and owners' motivation. These aspects are among key criteria for selecting "right" acquisition targets. The other critical aspect is owners' price expectations, which are commonly based on overheated historical values. Price gaps can be a deal-breaker because owners may choose to wait for better times unless their business is really distressed.
At CDI Global, our special focus and capabilities are set on acquisitions of
non-listed, medium-sized Russian companies that have a potential for leadership
and a clear business transformation outlook. We call them "entrepreneurial gems"
or "new wave" companies formed as start-ups through the 1990s. A buyer will have
to face a number of typical challenges related to this category of acquisition
- Achieving seller's motivation and overcoming fears and resistance
- Overcoming information gaps and a general lack of transparency
- Understanding business risks and opportunities for unlocking inherent value
- Bridging gaps in price expectations and achieving the objectives of the negotiations
- Managing the decision-making process, leading to deal structuring and closure.
Author: Maxim Skobtsov