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CEE mergers and acquisitions - the coming boom

22 November 2016
Richard Kemmish

Is it even meaningful to talk about a central and eastern European market for mergers and acquisitions as if it were a single thing? Obviously not. As I personally get to know (and enjoy) the region more I start to realise the vast diversity contained in the CEE moniker.

Levels of foreign direct investment and growth rates have become less correlated through the region since the global financial crisis.  Different monetary and political responses to this have exacerbated the attractiveness of different countries to outside investors and highlighted the regional differences. 

Fade the idea that the region is a coherent investment area and realise the vast divergence in risk/return profiles available and inevitably you need portfolio rebalancing. This is trivial enough for a bond or equity investor (give or take the occasional shortfall in market infrastructure in some local currency markets) but expensive and time consuming for (in roughly ascending order) private equity, corporates and financial institutions. 

Western Europe ‘push’ factors are equally important for the forthcoming M&A boom.

The recent record-breaking sale of Allegro in Poland to a consortium of private equity investors must have been at least partly driven by the dearth of investment opportunities in low growth Western Europe for private equity. This coincides with a hefty inflow of funds into the sector from retail investors (“...or can I interest you in some negative yield bonds or some vastly inflated public equities?”). The plentiful liquidity available to the entire financial sector as a result of the ECB’s extraordinary monetary policy can only have made the investment decision easier.

Financial institutions similarly have factors increasingly pushing them to rationalise their CEE investments. More stringent capital requirements have been a driver of divestments for several years already but has not been fully felt in the CEE region yet. Similarly the increased importance of the single resolution mechanism and the growing assertiveness of local bank regulators which is at least a partial response to this, has created an environment where simplification of bank holdings has been increasingly important.

Politically motivated changes to the balance between creditor and debtor, the growth of fintech and the lower cost benefit that accrue from retail depositors (thanks to ECB repo operations and the general flattening of yield curves) and it is clear that financial institutions will be increasingly active in divestments in some countries.

The recently announced merger between Nordea and DNB’s Baltic operations suggests though that the correct response to these forces isn’t necessarily divestment, it can just as easily be reorganisation for synergy and critical mass.

No, it is not meaningful to talk of a single CEE M&A market, but in every sub-market similar factors apply, all of them point to a busy couple of years.

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