Investors from inside and outside CEE markets are drawn to the region for the following reasons: its strategic location bridging western Europe with Asia and the Middle-East, a strong talent pool, high levels of economic growth, a growing middle-class demand and relatively low transaction valuation multiples, among many more. In 2019, M&A activity maintained the previous year’s momentum, with 726 deals recorded. For more of the 2019 statistics, click here.
Many of the 2019 deals originate from investors in western Europe; the traditional CEE trading partner. Oleksii Larionov, head of Financial Advisory Services at Mazars Ukraine, explains why: “Geographical proximity, time zone, and cultural similarities are all factors driving western European interest in CEE… There is little language barrier, and the way of doing business is similar, so it is easier to negotiate deals and understand the business models than in many emerging markets.”
Emerging market potential
That ease of doing business mixes well with emerging market potential, constantly improving infrastructure and natural resources to deepen external investor interest – both from western Europe as well as around the world. Several countries in the region, including Russia (CEE’s largest market), have massive natural resources. But unlike many emerging markets, most countries in the CEE region are not dependent on commodity exports and the associated foreign direct investment.
Zoltán Benedek, Partner at Mazars Hungary, says, “CEE has an advantage compared to other emerging markets in that its economy is diversified… We see transactions in agriculture, chemicals, IT services, retail, and so on. There is a good risk profile compared to other emerging markets.”
Surpassing regional rivals
Membership of the European Union – which covers the majority of CEE countries – goes someway in reducing business risk. The region has also proven to be resilient to wider business trends: recent years have seen CEE countries withstand global headwinds – further adding to its reputation as a business hotspot. The identical transaction volume in CEE for 2018 and 2019 surpassed South-East Asia and Africa, where volumes were down 17% and 11% respectively year-on-year, while activity in India and Latin America suffered less (down 2% and 1% respectively).
High growth potential and consolidation are also adding to CEE’s investment credentials. International and regional private equity players are attracted to the region as they hunt for value at a time of slow growth and low yields in developed countries, but also because of the growing range of targets as domestic businesses reach maturity or consolidate. While markets remain somewhat fragmented, regional consolidation in some sectors, such as financial services, is changing the investment picture.
External factors slowing investment
There are, of course, challenges that turn investors off. In the ‘Investing in CEE: Inbound M&A report 2019/2020’, we outline how any decline in overall dealmaking can largely be attributed to external factors, most notably trade tensions between the US and China, but also including Brexit-induced uncertainty. Meanwhile, international sanctions against Russia continue to slow certain investment opportunities.
“The CEE market is still very attractive, so the number of transactions is the same as in previous years,” says Larionov. “But value has decreased because the overall approach of investors has become more risk-averse; they are keen to hold cash and make fewer big transactions, given the global context.” Challenges that investors face in many CEE markets include excessive bureaucracy and slow official processes and patchy infrastructure, though EU funding is helping address the latter.
Western Europe, the USA and Asia leading inbound bidders
By considering the largest source of inbound M&A activity, the region’s internationally diverse future becomes apparent. Western Europe is traditionally the first investor in CEE, with companies coming mostly from Germany, France, the UK and the Netherlands. Multinationals and PE funds from the USA are also very active in the dealmaking landscape. On top of that, there is a growing interest coming from Asia (China, Japan, Singapore) which contributes to maintain the positive M&A outlook for 2020.
To find out more about foreign investors and what’s making the CEE an M&A hotspot, read the full report: ‘Investing in CEE: Inbound M&A report 2019/2020’.