Along with a general increase in M&A activity, we have recently been involved in the following types of transactions. Firstly, Cash rich overseas corporations looking to make investments into Russia and the CIS countries. Typical deal sizes are $25-250 million. Secondly, private equity is on the increase, although mostly at the mid-market level and still dominated in Russia by the domestic players, who still often have home-territory advantage over overseas investors. Thirdly, major Russian banks, including those where the government holds a majority stake, have successfully established investment arms and have made investments in a series of strategic projects. And finally, investment alliances and joint ventures between Russian and overseas partners are also now back on the table, although at greatly reduced levels to pre-Crisis days.
What are the key challenges by companies when involved in a merger or acquisition?
Pricing remains a key issue, although the pricing expectations gap between buyers and sellers has significantly narrowed in the last 12 months. Buyers are much more cautious now and often seek to structure payment over an extended period, with escrow retentions, earn-outs, share lock-ins and so on.
There is a heightened importance in the due diligence process, particularly in areas such as bankruptcy, where the Russian procedures and tools available to creditors differ from those in most Western regimes.
Many investors still want to structure Russian transactions so as to make use of foreign laws (particularly English law) and this leads to complex deal structures and the need for legal and tax advisers in several jurisdictions outside of Russia.
What challenges do foreign investors face?
Day-to-day control over the business going forward is a key issue, particularly where one party is based overseas and does not have an large or experienced management team on the ground in Russia.
Legal and financial regulation and compliance is complex and can create many pitfalls and potential risk areas for the unwary investor. Amendments to anti-raids legislation and also the interpretation of anti-trust legislation are often cited as key areas where issues can arise.
Which sectors have seen the most activity?
Telecoms, oil and gas and energy all continue to do well and remain naturally strong sectors in the Russian markets. Retail, pharmaceuticals and foodstuffs have also done well and continue to grow. Real estate was hard hit by the Crisis, but logically this will also start to improve as the rest of the economy continues to pick up, particularly in the big cities where warehousing and Western standard accommodation are still in relatively short supply.
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