Buyers move in as more companies struggle

RIGA - International law firm Sorainen says merger and acquisition activity in the Baltic region remains depressed, although a number of notable transactions have been completed in the last six months, reports news agency LETA.  “It is no surprise that the level of M&A activity in Estonia, Latvia, and Lithuania has significantly decreased during the current year. This tendency is well demonstrated by the volume of deals notified to the competition authorities of the three Baltic states,” says a Sorainen Legal Updates report. M&A transactions have been mainly centered on distressed buyouts.
This report reflects the general tendencies seen in Europe, where the number of deals in the second quarter of 2009 dropped to the level of the second quarter in 2003.

The collapse in deal-making is due mainly to the economic environment, the lack of optimism in financial markets and a general reluctance by the banks to finance acquisitions. Limited external financing has narrowed the circle of potential buyers and now only cash-rich companies can afford acquisitions, says Sorainen.
The market of the three Baltic states is dominated by strategic investors seeking to increase their market share or those who are coming into the Baltics for the first time. Financial investors are nowhere to be seen.
Though sellers’ expectations have fallen significantly and the ‘expectation gap’ on hoped-for prices has shrunk, buyers continue their aggressive bidding as the market remains under their control. Therefore, owners sell only when they’ve run out of options in raising capital for their struggling businesses.

Sorainen’s experts say that, depending on the level of distress, a target company may need fresh capital injections immediately, and may lose a lot of value if the sale process is delayed. This makes the timing for preparation and closing of the transaction crucial and extremely tight. What previously took a couple of months, in a distressed situation happens in weeks. Deals also become less formal and often involve simpler schemes.
Sellers now easily give up representations and warranties, and seem to care only about price and payment terms. This sometimes backfires, say the experts, with substantial claims from buyers appearing after closings. Proper due diligence, despite attractive prices, remains an essential element of the process.
The Baltic markets are expected to start recovering gradually, though distressed buyouts may represent a significant part of transactions for some time.