M&A in Russia: Negative Trends with a Silver Lining?

moscow city
  • Western investments in the Russian market seem to have a tactical rather than a strategic approach in mind.
  • Some Russian companies are managing to conduct successful acquisitions abroad, intending to further develop business there.
  • Tech companies in Russia seem to be the new investment hotspot, however, many of them are not ready for deals.

The total value of mergers and acquisitions on the Russian market dropped to $4.99B in Q3’20, according to the AK&M report, cited by the Russian business newspaper Kommersant. This result is the worst ever Q3 outcome on record, it adds, pointing to the global crisis and the devaluation of the ruble. Nevertheless, the study shows, the average value of transactions rose by 13.5% to $52M.

Despite several periods of turbulence, and downturns, the Russian M&A market ‘is still alive’, as Ruben Israelyan, Partner, Head of M&A CIS at EY, optimistically puts it. His team has closed five deals in the last 12 months. However complex the market may be, it is showing several signs of activity. During the M&A Community webinar, we discussed how the Russian market is facing local and global turbulence.

M&A Trends in Russia

It’s hard to be positive while describing the current M&A landscape in Russia, Israelyan admits. Among the observable trends, he lists the following.

  • European and American companies continue to exit the Russian market. Recently, for instance, British retailer Kingfisher Plc. sold its Russian DIY store chain, Castorama. According to Ruben, another international FMCG giant is currently finalizing a deal to leave Russia.
    The main reasons for exiting, the panelist says, are economical. ‘Nevertheless, these exits are preceded by several years of underinvestment, of the lack of attention to the market, resulting in unsatisfactory financial results.’
  • Tactical investments in the Russian market. There is some capital inflow into Russia though, Israelyan adds, mentioning a recent example of a global IT-company buying a large systems integrator in the country. ‘These market entries have a rather tactical than strategic nature. Mainly, it goes about supporting an existing business or increasing its capacities, with no strategic plans to grow on the Russian market,’ he explains.

Still, Ruben stresses, exit numbers are higher than entry ones.

  • Russian businesses entering foreign markets. Recently, the EY team has helped a large Russian industrial private company to buy assets — two heavy industry plants — in Bulgaria. Two years ago, the same company acquired three Skoda Electric plants in The Czech Republic and Slovakia. ‘These acquisitions were made to restructure the assets, to put these industrial capacities in order, and further develop the businesses.’
  • Foreign financial investors are leaving Russia. ‘The situation with the private equity group Baring Vostok [whose stake in Vostochny Bank was seized by court order in 2019] had a significant negative impact on such investments, undermining investors’ respect and trust,’ Israelyan adds. There are just a few purely PE funds left on the market. Consequently, he says, the level of professionalism on the market is falling.
  • Lack of strategic approach in M&A. The vast majority of deals in the Russian market, Ruben says, are aimed at solving some tactical problems, there is no long-term thinking of ‘large stories’ in mergers and acquisitions.
  • The amount of liquidity in the Russian M&A market is plummeting. As there are not enough financial investors and foreign investors, the value of deals is decreasing whereas the buy-side has the upper hand in negotiations. Thus, it is getting harder to close a deal, says our panelist.
  • Reluctance to use external M&A consultants. ‘Companies tend to create their own M&A teams, for instance, MTS and Megafon [Russian largest telecom companies] have their own financial and banking departments to conduct deals,’ Israelyan explains. Quite often, he adds, businesses in Russia do not understand the additional value an external M&A advisor may bring.  

Venture Capital and Private Equity in Russia

‘Since the beginning of 2020, we’ve closed about 20 deals, being busier than ever in the last 5 years. This is quite a lot even for a large consulting firm in Russia, such as ours. Unexpectedly, I suppose, it was our mix of private equity and venture capital that led to such results even with the backdrop of the pandemic and the related restrictions,’ says Olga Sorokina, Managing Partner at O2 Consulting Group.

This growth, however, can only be observed in certain industries, mainly in the tech sphere. The most active of them has been Adtech, Sorokina adds. Lots of such businesses were not ready for such skyrocketing growth and were forced to undergo rapid restructuring, and also to increase their capacities.

Fintech and Agtech have also attracted significant investor interest, Sorokina points out. It was unexpected on the Russian market, as these industries were practically in their infancy. During the pandemic period, these tech spheres were also among the most successful in terms of gaining foreign investment, our panelist says.

‘Nevertheless, many companies, especially in the biotech industry, were not ready to welcome such an intense flow of investment, not ready to close the deals, nor to make quick decisions. Meanwhile, if a company prefers a more conservative way to negotiate a deal, it would simply fail,’ Sorokina said as she explains the structural M&A issues of Russian tech businesses.

Yet another trend to define the M&A landscape in Russia is a large number of corporate conflicts. Covid-caused limitations of communication, the inconsistency of antivirus measures — all of these have led to numerous tensions that businesses were not prepared to face.

Sorokina says that as a result of this, many companies were stuck in deadlocks instead of making decisions to move forward. ‘It is important for companies to understand that they need to get ready for such turbulent situations during the ‘calm’ periods,’ she says.

One more thing that makes M&A in Russia more complicated than earlier, namely the sanctions. The latter has gotten so complicated and multilayered that it is taking lots of time and effort to get legal clearance for deals. ‘Sometimes, if a company doesn’t have well-established processes, it is really difficult to define all of the M&A-related risks,’ Sorokina concludes.

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