Acquisition activities in the Central and Eastern European region, mostly with the participation of smaller and mid-sized companies in Western European terms, have not abated last year despite the sub-prime mortgage crisis. The big question is whether this could be maintained in 2008, as well and if so, should we expect any shift in the composition of merger and acquisitions. Portfolio.hu has interviewed István Préda, managing director of Magánbankár and Zoltán Siklósi, chief executive of Invescom to find the answers. Portfolio.hu: How do you think M&A activity will change in Hungary in 2008? 
István Préda: There are several factors that can push the market of private companies' acquisitions in a number of directions. The long-term trend is that an increasing number of businesses will reach a point where they will have either not enough knowledge or ambition to step forward or the owners will simply want to stop making money and start enjoying it a bit. This process will continue this year, as well.
On the other hand, the recent tightening of the fiscal leash broke the growth momentum in several sectors, e.g. construction and retail. There will be companies that will make use of the still existing upward more and quickly start ridding of the business. At the same time, there will be some who are not pressed for time and they are likely to wait for the election-related boom in 2010 and opt out during a heavy uphill ride.
The third factor is the increasing tax wedge that some will try to counterbalance by more work and creativity, but others will chose to get out "tax efficiently" and re-channel their funds to real estate or securities instead.
Zoltán Siklósi: If you want to explore the part and parcel of the M&A industry, you need to scrutinise both the demand and the supply side of it. Strategic investors still play a key role on the demand side. There are more and more medium-sized Western European companies (with annual revenues of several hundred million euros) that have just started to realise they have forgotten to set foot in the Central and Eastern European region, and this creates ample demand in several sectors.
As for the financial investors' side, it is the growing amount of money that increases the number of acquisitions, since the more money you have the larger the pressure to invest.
Considering that it is not at all easy to find a target for your increasing capital, the trend indicates that larger deals could be pushed to the foreground. This, however, is not the case in Hungary, since there are only a few companies that fall into this category. For those seeking heavier deals this leaves Poland and Romania.
What could still give a boost to the Hungarian M&A market is the rising activity of local investors and a further development of JEREMIE funds.
JEREMIE, the Joint European Resources for Micro to Medium Enterprises initiative, was launched by the European Commission, the European Investment Bank (EIB) and the European Investment Fund (EIF) to improve access to finance by small and medium sized enterprises (SMEs) in EU regions. It allows Member States and regions to use part of their Structural Fund allocations to fund small enterprises through specific financial instruments designed for SMEs. It also gives small businesses the chance to cut through red tape and readily access available funds. There is around HUF 150 billion available in JEREMIE, and about HUF 50 bn are to be invested into venture capital funds, which can invigorate the whole private equity business.
On the basis of investors' inquiries at us I can say that while global M&A activity may decelerate in 2008, the number of transactions will probably rise in the region.
Portfolio.hu: Which sectors and what transactions sizes could be the least affected by the dour global sentiment? István Préda: The junk mortgage bond crisis primarily affects transactions where the share of private equity is above EUR 100 million. Hedge fund investors withdrew from these and banks have also grown more cautious about them - this is why valuations dropped considerably. In Hungary, we cannot really feel the impact of the sub-prime crisis in deals between EUR 3 m and EUR 30 m, but the cost of borrowing at buyouts did go up here, as well.
Zoltán Siklósi: I believe mid-size buyouts are the least affected (companies with annual revenues of a few tens of millions of euros), especially those companies where buyouts can traditionally carried out with lower capital gearing. Sectors of lower capital gearing include a few specialised construction segments, manufacturing segments, but IT and certain servicing activities may also belong to this group.
Portfolio.hu: What kind of overall changes do you foresee on the demand side? István Préda: The appetite of strategic investors has clearly not abated. Quite the contrary, the shortage of credit caused by the sub-prime crisis, which had private capital funds' "teeth pulled out" of, has increased their chances to be successful in bigger tenders. Company owners who still have the pre-crisis valuation multipliers flashing in their mind will probably wait, which will reduce demand and drive the market towards smaller deals.
Zoltán Siklósi: While the growth of global M&A activity may falter in 2008, I do not believe this will be the case in the CEE. Investors are looking for all kinds of companies -they equally seek ones with special commercial profiles, manufacturing firms and media units.
The problem with Hungarian companies may be that the grade of the specialisation is low, which means they deal with too many things at once and foreign investors prefer companies with a clear profile. As for the favoured size of the companies, I would say firms with annual revenues of at least EUR 10 m may remain in focus.
Portfolio.hu: Should we expect a negative shift in valuation levels? István Préda: Yes, we should. The valuation of buyouts is seen rising by 25-50 basis points in Hungary, as well, which will be evident in local banks already in the first half.
Zoltán Siklósi: I do not believe changes will occur valuation wise in mid-size buyouts. Domestic M&A activity did not slow down in the second half of last year either, while the sub-prime mortgage crisis was at its peak on the world market. Any concern in this respect should be offset by the growth potential of the region, and the aforementioned low capital gearing levels do not justify negative developments, either.
Previous
