Although the year 2020 cost the Russian M&A market dearly, the market was able to stay afloat even during those hard times, as investors aptly adapted for the new conditions and the pandemic automatically triggered rapid development of the online segment in many sectors of economy. Alexey GORODISSKY, head of Corporate / M&A department of Andrey Gorodissky & Partners, shared his views with Kommersant as to the previous year’s potential effect on forecasts for the M&A market.
Forecasting is commonly known as a thankless job, still one cannot go at all without it. When elaborating a development strategy for a key practice line of one’s own firm, one cannot but look at a forecasted canvas for the forthcoming year, especially if such practice line is somewhat exposed to risks associated with the general investment and economic climate in the country.
For the M&A market, the last year was predictably hard: amounts of the implemented deals have proved to be lowlier than the 2019 figures, both in quantities and total value amounts. According to the published studies and reports, at least those publicly available, most substantial deals were made in oil and gas and metallurgy sectors. According to experts’ opinion, the Technology and Innovation sector is the only one maintaining approximately the same level as before, although even it has suffered some reduction in the overall value of deals, while the amount of closed transactions has grown up. The fact is intriguing indeed.
The spectrum of relevant arrangements was diverse, from creation of various ecosystems to exciting projects in Food-tech, Ed-tech or Food Deliveries. Real Property & Construction, Transport & Infrastructure, Insurance and Banking sectors sank much more.
The past year has not brought about anything good, new or at least something productive in international relaions either. Perhaps, a most accurate brief description thereof would be like that: uncertainty sustains and sanctions pressure grows up. And, certainly, the pandemic and global lockdown, with its local specifics, have contributed a lot to the situation.
All those factors, taken together, could not but have an effect on the investment climate and the M&A market. The inflaw of direct investment into the Russian economy had been falling down consistently during the year: KPMG estimates that Russian asset purchases by foreign investors substantially decreased by 43% in worth and 34% in numbers of contracts. Furthermore, international investment deals have shown that foreign investors are mostly withdrawing from Russian assets in which they invested.
That said, the 2020 year start did not seem bad for the M&A market. Firstly, deals generated in 2019 were being signed and closed. Secondly, the same applied to agreements scheduled for the 1st quarter of 2020. However, the second quarter of the year brought about a collapse – the markets (and the M&A sector was no exception) proved to be unready for the lockdown, and many deals being at the initial phase were frozen.
Under the conditions of economic uncertainty, driven mostly by international politics and the pandemic, business people faced the issue of fair evaluation of assets. Some businessmen focused on saving their businesses, while others needed more profound pre-investment investigations to determine long-term implications of the crisis and obtaina growth forecast.
Then the suspended deals started being closed at a hectic speed, and at that moment the Innovation and Technology sector was able to shoot ahead. Under the lockdown conditions that made physical meetings impossible, documents were being developed quickly, negotations conducted remotely and transactions executed the same way. A crop of bright closings in the Innovation sector showed that the accelerated digitization has increased the value of technology companies and businesses with the relevant component.
What are potencial forecasts for 2021? With cautious optimism, it can be supposed that the likelihood of a repeated full-scale lockdown is low. However we have not left the pandemic behind and it will be with us for quite a long time and the lockdown consequences will continue having an effect on the corporate sector.
Still, the pandemic has not brought about negative consequences only, as in fact it boosted the growth and development of the online segment in many industries. The EdTech market showed an explosive growth, online movie theaters increased their proceeds substantially, and an HR-tech deal closing was announced some days ago.
No improvement is seen in international relations, and the sanctions will surely last our time, so no inrush of foreign investments is to be expected. And the bankruptcy moratorium abolition will also affect players in various business sectors, mainly those affected most severely by the pandemic. It can be expected however that the transactions suspended or abandoned in the last year may be implemented during this year. Big businesses will start actively shrugging off their non-core assets, while those least affected by the pandemic will strengthen the consolidation trend to survive.
Probably, we will continue seeing structural changes aimed at fast adaptation for the new post-pandemic conditions, which means further development of the Investment sector and growth in numbers of digital technology deals. Naturally, with the current economy structure and practically no active foreign players in the Russian M&A market, it will be big difersified Russian holdings and partially government-owned companies who will continue setting the trends..
It can be expected that banks striving to create their own ecosystems will be amongst the leaders too. On their heels, IT giants and digital services providers will come, as they also have designs on full-scale dominance in everything concerning in any way the provision of services to people and households. I believe that the year 2021 will roll on under hegemony of ecosystems.
Speaking of law-related peculiarities of the past year, it is noteworthy that the transations ‘localization’ trend has persisted. Although the choice of a non-Russian law still occurs for sure, the numbers of Russian deals go up, from what I see; the five-years’ period of efficient application of Russian law and the emerging case law are yielding first tangible results. Remarkably, not only the numbers but also the amounts of transactions structured under Russian law are steadily on the rise – both in the transaction value and the worth of the parties and assets involved. As per today, plenty of players in the Russian market have appreciated that even most challenging non-standard transactions can be structured under Russian law.
On the balance, notwithstanding all adversities, the M&A market is more alive than dead. Remarkably, even during the period so hard for global economy the Russian M&A has proved to be able to maintain the 2017 level, both in the numbers of transactions and their aggregate worth. Despite the growth of issues triggered by the new realia, businesses have shown their ability to adapt for operating under precarious conditions, to change strategies and find new opportunities.
Which lawyers and consultants will have a greater stroke of luck? The Innovation and Technology sector has already been routinely among the biggest segments of the Russian M&A market, and the previous year’s lockdown even strengthened the sector’s development trend. Highly sought after will be, first of all, teams having deep knowledge and competence in the field of technolody, media and telecommunications, which are able to predict sectoral trends, form and appropriately manage customers expectations. Lawyers having both experience in M&A processes and deep knowledge of IP and personal data matters will be at the top too. Also, consultants with experience in implementation of complex restructuring projects will still be in demand.