Delovaya Stolitsa, 26.04.2010
Merges and Acquisition in Ukrainian style or reasons for the lack of activity in the M&A market
Economic crisis, political instability, a number of elections, conflicting laws are those realities in which the Ukrainian business was forced to be the last year or two. The instability of the banking system and lack of access to credit resources have become the “litmus test”, which clearly demonstrated absence of ability of many Ukrainian companies to plan their activities and efficient use of financial resources. Panic of many managers led to massive reductions in personnel, the bankruptcy of branches, and from time to time – to the closure of at first glance sufficiently large and sustainable companies.
But man can not always be under stress. The first phase of the crisis has gone, companies have found new opportunities kept afloat and maintain even credits, reorganized the team, ended with the election – appears indexes of so desired by all condition under the name of – “stability”. Many business owners are critically examined the state of their business, realized the need to sell noncore assets or attract an investor, a partner who can provide this much needed financial resources. In turn foreign investors that were all this time in so called “supervisory positions” and were waiting to minimize the price of Ukrainian assets, realized that the fabled “bottom” has arrived and it’s time to buy.
It would seem that M&A market should remain at the peak of activity! But now we have certain stagnation in the middle price segment and rare glimpses of the so-called “mega-merger” which in comparison with the 2006-2007 year, just show a very low level of activity. What is the cause of this situation? Why if investors want to buy and the same explicit desire of the owner to sell - they do not make a deal?
As a financial advisor of mergers and acquisitions market, I find myself for a few reasons for this situation. First, the mentality of our seller’s quite specific. We have not yet used to think ten years ahead, to create a business, knowing in advance as to whom and at what cost it will be sold in a few years. Many businessmen find themselves in situations where the value of the asset in the crisis was significantly lower than the loan amount which was issued under the asset, so they preferred a policy of “waiting till the crisis is over”. At the same time they were increasingly falling into the debt trap, getting tangled in credit, percent rates, debt and trying to solve all of this by cost reduction. Not many owners try to solve the issue through the sale of distressed assets. The understanding of sale for many of the owners - means profit. And the impressive profit. And consider the deal as a deliverance from the daily increasing debt many of them are not ready.
The second reason, in my opinion, this is the internal organization of many Ukrainian companies. Existing prescribed marketing strategies, the availability of results of audit conducted by international companies, the “Big Four” for example, transparent, understandable competent business management structure, and interaction with customers - all this do not become a priority for many companies and was seen as something absolutely not affecting income. But there are those factors that will pay attention potential buyer! All this affects the value of the company and to substantiate the claimed value only such arguments as the average annual income, alas - did not turn out.
From the above two reasons I created the third, the most basic to the successful completion of any transaction - the ability of the two sides find a common language, the ability to negotiate and argue their position. Exactly this function should provide the operator M&A. Of the ten potential deals to the signing of the agreement comes one. From my experience and practice namely the one that was serviced by the professional operator. The difference in approaches to the maintenance and valuation of the business I have already mentioned. Now let’s take into account also is extremely important mental factor. A successful businessman is a talented manager and a good financier, a charismatic and creative personality, but, alas, - it does not always mean a professional negotiator. Professional negotiation - a person who is able to gently and tactfully convince the contractor to their cause, to argue their position, able not just to listen and hear, do not raise a voice to the dispute, “keep reputation” at any cost. Now imagine for a negotiated two potential parties to a transaction - from the buyer’s side it is a European businessman with appropriate manners and way of thinking, who came to buy, for example, a plant. On the other hand - the director of the plant, which has worked there for 20 years, accustomed to command and accepts no objection. What are the chances of these parties come to a common result in the negotiation process? No chances. And this is the main reason why after the first meeting a lot of negotiations are finished. Without professional help not just in the selection of a potential client or project, but also in operating of the transaction is extremely difficult to do.
The real boom of activity will come on M&A market in Ukraine when our sellers of assets will realize that today – it is “buyer’s market”. Market realities have changed, those who want to operate successfully in new environments, will have to change their stereotypes of doing business. To be a successful trader, not enough to have just a good product, you should still be able to show the buyer that the product is good. Given the new political realities and the gradual recovery of activity in many markets, I am sure that the end of 2010 - beginning in 2011 will be the time of maximum interest to Ukraine from international investors. What are the chances of turning potential interest in the real deal? - Depends on your approach to business, gentlemen businessmen.