Spotlight on the M&A environment in CEE

This article is an extract from the European M&A Outlook 2024: Turning the Corner? For the full report, follow the link at the bottom of this page.

Marija Tešić, Partner at CMS Serbia, and Błażej Zagórski, Partner at CMS Poland, react to the findings of our latest study and share their thoughts on the outlook for CEE

How have M&A markets throughout CEE evolved as a result of developments in the region, particularly with respect to the ongoing war in Ukraine and sanctions against Russia?

Marija Tešić: 2022 started with various challenges – geopolitical tensions following the outbreak of war in Ukraine, followed by inflation, escalating interest rates, and problems with energy distribution. Nonetheless, M&A markets throughout CEE proved to be resilient. Market players were cautious, but transactions were still moving forward, adapting to the new, unfortunate, circumstances.

It became increasingly apparent that the war would not end as quickly as some initially expected. The year ended with predictions that 2023 would be the hardest period for the regional economy so far, although this is yet to be seen. Sectors such as telecoms and IT, as well as energy & utilities, remained strong within the CEE’s M&A landscape, together with the industrial and real estate sectors.

In light of the geostrategic conditions in CEE since Russia’s full-scale invasion of Ukraine began, in addition to macroeconomic issues, how has the region’s M&A space performed this year?

Błażej Zagórski: The macroeconomic challenges have been decisive here; these factors play a critical role in M&A and the sentiment of market participants. Geostrategic and political aspects are also considered, but as a secondary issue.

The level of M&A activity in H1 2023 was rather moderate. Also, when compared with H1 2022, a material decline can be seen. However, the general perception is that the market performed better than expected, with several headline deals being announced and an increase in activity compared to Q4 2022 and in each of first two quarters of 2023. There is evidence that more targets are coming or are about to come to the market.

To what extent, if any, have some countries been able to capitalize on the consequences of the Russia-Ukraine conflict?

MT: Shortly after the geopolitical tensions between Russia and Ukraine started, a surge in dealmaking occurred. Global investors were aiming to cut their connections with Russia and offload their jointly-held subsidiaries with Russian firms or move investments to other countries. CEE nations have been seen as an alternative for these relocations.

The situation is more specific in Serbia, which has not imposed sanctions on Russia. Hence, the country has been of interest for foreign investors pulling out of Russia, but also for Russian entrepreneurs seeking to relocate their businesses and to distance themselves, their families and economic interests from Russian aggression. These factors contributed to increased deal activity in Serbia. However, the region as a whole has, of course, faced serious difficulties as a direct or indirect consequence of the Russian aggression.

BZ: The Russia-Ukraine conflict exacerbated macroeconomic challenges and added geostrategic complexity in the region. The end of the war and the launch of the reconstruction process would be a major boost for the region, particularly for countries directly neighbouring Ukraine. Such a boost could open new possibilities for M&A.

What have been the main drivers of M&A in CEE through the first six months of this year?

MT: What is specific for CEE countries is a rather favourable treatment of foreign investors, relatively low taxation and lower labour costs, and less strict state-aid and FDI regimes (especially in non-EU countries). This has made the region a preferred destination for companies looking to establish their foothold in Europe or expand their existing operations.

BZ: Investors can benefit from solid foundations in the CEE market, such as space for market consolidation in many sectors, a significant pool of talent and lower labour costs, as well as technological innovation. As in the last few years, we observe that the energy transition and digitalisation are driving activity. Both sectors have benefitted from their resilience to macroeconomic pressures. Strategic investors are also actively seeking to increase their market position. In turn, as in other regions, PE funds are more cautious and rather focused on managing and growing portfolio companies.

Leaving the Russia-Ukraine war to one side, how is the near term macroeconomic outlook for CEE shaping up? Which countries seem best placed to rebound strongly in 2024?

MT: While the remainder of 2023 and 2024 are expected to be challenging, the region’s strong businesses, innovative dealmaking, and the ongoing support of the EU’s Resilience and Recovery Facility will offset the macroeconomic challenges. Poland has so far been a clear winner regarding deal flow volume. Countries like Estonia, Lithuania and Latvia, have attracted substantial foreign direct investments in recent years, but this positive trend has been jeopardised by the ongoing conflict in Ukraine and its impact on neighbouring economies.

Looking at Balkan countries, Slovenia remains an attractive market with numerous small and medium-sized export-oriented companies. Croatia’s appeal has also grown, especially following its entry into the eurozone and Schengen area, bolstering confidence in regional stability. North Macedonia has investment potential, contingent upon improvements in political stability and regulatory enhancements that ensure security for foreign investors.

Which sectors will record a meaningful uptick in deal activity over the next 12-18 months?

BZ: Technology and energy will be among the most active sectors, reflecting long-term trends and the availability of high-quality targets. I would also expect an uptick in the manufacturing sector, in connection with supply-chain diversification and a more positive economic outlook, as well as in healthcare, where we already see increased deal activity. If the region’s geostrategic situation improves, this could be a driver for activity in other sectors, such as infrastructure and transportation. Still, a key challenge will likely be to overcome valuation gaps, but finding common ground could become easier in more favourable economic conditions.

MT: As we approach the end of 2023, it is clear that market uncertainty – about inflation, interest rates and energy sources – will continue to influence decision making in the year to come. Of course, conditions are never perfect, and rarely, if ever, entirely calm. But after all, as the writer Vivian Greene once said, “Life isn’t about waiting for the storm to pass, but about learning how to dance in the rain.”

To download the full report please follow this link