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In contrast to the economic downturn, the M&A market continues to expand

Mergers and acquisitions (M&A) transactions, or simply put the sale and purchase of businesses, are continually closing. Economic changes, whether booming or stagnating, lead to the expansion of such deals.

The “Belorussians and market” newspaper found out about the impact of the crisis and the current situation of the Belarusian mergers and acquisitions market from professionals at Capital Times Investment Advisory's Minsk office. For the past 15 years, the business has provided professional services in this sector.

“Every business owner has various incentives for the M&A transaction. In Belarus, we identify three potential fundamental tendencies,” says Dementiy Yuferev, Investment Banking Director at Capital Times.

According to the expert, Belarusian enterprises have been looking for new strategic decisions as they come to realize that the growth rate is dropping year by year. It is not always viable to outperform competitors by adopting progressive business processes, skills, and technology. This is the point where the owners dare to take a radical move by engaging the strong foreign partner possessing cutting-edge technology, knowledge, and financial resources.

The second most prevalent reason to sell the business is a realistic evaluation of the market distribution in the event that an international company would enter the Belarusian market. A new player in your business sector means that they will eventually take over all of the market participants' market share. Furthermore, if this new player is an international firm that has state-of-the-art technology and a marketing budget, they will take over the market share whilst also lowering prices, influencing the sector margin in general. In this scenario, the owner would make a strategic decision to sell his company to an international player.

“There is another trend we see today: if companies of Belarusian origin approach the so-called “glass ceiling,” they begin to consider participating in other markets (eastern or western) where they can compete with top players independently by establishing a regional office, or by purchasing an existing local company through an M&A transaction,” said Dementiy Yuferev.

The M&A market's reaction to the 2020 crisis

According to the Capital Times research, 32 M&A transactions with disclosed parties were completed last year, with 20 involving international companies. Compared to 2019, the overall number of transactions declined by 24%.

The IT industry was the ultimate winner in terms of closed deals (16 deals), with the remaining 16 deals pertaining to other economic sectors.

Despite the country's deep economic downturn as a result of the COVID-19 epidemic and political unrest, the Belarusian M&A market in 2020 was quite active, ranking second in terms of the number of deals over the previous 6 years.

“The mergers and acquisitions market is always responsive to economic trends. When the economy is growing, powerful players want to profit from it by purchasing promising businesses. When the economy is in a slump, enterprises with a rainy-day reserve get an opportunity to purchase weaker competitors at a lower cost,” said Kiril Krupenkov, Minsk office CEO, Capital Times.

Rare investors with a long-term view on Belarus see the country's economic and political crises as an opportunity to acquire assets at a significant discount, while tech companies with an off-the-local-market business model remain appealing to international investors despite the minimal discount.

The purchase of the Belarusian company Melsoft by the Israeli developer Moon Active at an estimated $500 million is the largest deal in the IT sector in 2020. The second big transaction was the investment of the Australian gambling giant Aristocrat in the Minsk studio Neskin Games.

M&A market in january - april 2021

According to the Capital Times analysis, over twenty transactions involving companies of Belarussian background were completed in four months. In contrast to the same period in 2020, the number of transactions increased by 82%.

“90% of transactions were completed in the IT sector. These companies have a business model that focuses on international markets, hence they are less affected by negative political and economic risks than other sectors,” - stated in the Capital Times review.

According to Dementiy Yuferev, the peculiarities of access to finance for M&A transactions in Belarus did not have a substantial impact on their number. Foreign investors utilize their own funds to acquire Belarusian companies or buy their shares.

According to the experts, the Belarussian market in general is quite restricted in terms of deal disclosing information. However, the number of transactions with disclosed deal prices grew this year: 12 deals of 20 (60%) in four months of 2021, compared to 12 of 32 (38%) in 2020.

Half of closed deals employed the services of financial advisors in the first four months of 2021.

Foreign corporations in the IT sector are wary of the Belarussian economy and are hesitant to invest in it. In 2021, the only foreign investor was the Russian corporation “Tsyfrovye aktivy” (part of Sberbank), which invested in an engineering firm.

“Western investors are more familiar with the IT sector in Belarus than with any other industry. IT does not compete with Belarussian players, but rather sells its services internationally. Initially, they intend to target the entire globe. As a result, such companies have stronger competence and expertise, catch the eye of European and international companies more frequently, and become a target for acquisition,” stated Kirill Krupenkov.

What to expect from M&A market by the end of the year?

According to the CEO of Capital Times' Minsk office, the only thing that can now be forecasted is an increase in M&A transactions in the IT industry: "I am confident there will be many deals in the IT sector, perhaps more than in 2020."

Kirill Krupenkov remarked that there is now no clear relationship between the migration of the IT business and the M&A market, but this fact may be a motivation for additional M&A activity in the long run.

“Belarusian firms appear in other territories, relocate their personnel and hire new people, and establish business connections with consumers in these marketplaces. They begin to sell their products in new areas or in markets where they were present prior to the crisis but to a lesser extent. They are becoming stronger, more visible in the market, diversifying their product, and this will, over time, positively affect the attention of strategic and financial investors to them, ” assures the expert.

Kirill Krupenkov further said that certain Belarusian IT firms are focused on revolutionary rather than evolutionary growth of their business in other countries. They are considering purchasing IT companies in other countries in order to enter a new market with an existing customer base, local capabilities, and popular technology, rather than start from scratch. These companies may receive European finance for such transactions at European rates.

Source: Belarussians and the market