2016 was marked by relatively low activity in mergers and acquisitions. Although there were transactions in almost every sector, their total number remained very small. In this context, it is worth distinguishing between transactions that relate exclusively to the Ukrainian market, and the transactions made at global level and which contain a Ukrainian element. And, compared to the Ukrainian, the global M&A market intends to once again break all records on the total number of transactions
If we talk about Ukrainian transactions only, a number of transactions in the banking sector should be noted, for example, acquisition of Ukrsotsbank by Alfa Group. There were also several transactions in the agricultural sector (for example, the sale of the Creative Group), several investments in the IT sector (for example, investment by Soros in the Ciklum Company), as well as investment on the part of the Horizon Capital Private Investment Fund in the Rozetka Company.
Unfortunately, activity in mechanical engineering and heavy industry has not been noted, nor has serious activity been observed in the FMCG sector.
A notable exception was the pharmaceuticals market, where there have been several transactions, among which the investment made by the Farmak Company in Poland especially stands out. This investment by the Ukrainian company in Eastern Europe was a pleasant exception against the background of low business activity and the curtailment of business by Ukrainian companies in the Russian Federation and the Autonomous Republic of Crimea. The exit of the MHP Company from Russian business through the exchange of MHP's Russian assets for the Ukrainian assets of the Agriculture Group of companies, is an example of the latest trend.
The infrastructure sector, in particular seaports, is of particular interest. The creation of a joint venture between the TIS group of companies and global agro-industrial giant Cargill is an example of a transaction in this sector. As we know, Ukrainian and foreign investors are discussing new transactions in the area of port infrastructure and transshipment terminals.
Significant stepping up on the sales market of non-performing loans (NPLs), that is overdue loans with and without collateral, has become a new trend too. Although the right to claim for loans is the subject of the purchase, these are actually M&A these are transactions, which are often unfriendly or opportunistic.
Compared to the Ukrainian M&A market, the global M&A market intends to once again break all records on the total number of transactions. The USA is still the leader in number and volume of transactions. These transactions sometimes refer to Ukraine at least with regard to elementary receipt of permits for concentration (if the new thresholds are exceeded). Some transactions, for example in the IT sector, have a more direct bearing on our country, as the main personnel of many IT companies are concentrated in Ukraine. An excellent example of such a transaction was acquisition by Altran Company, a global leader in innovations and IT consulting, of the Lohika Company, a leading software development company. Lohika is headquartered in Silicon Valley, is the leading firm in the software development, works mainly in North America and has an experienced team in Ukraine and Romania. The company employs over 700 specialists, most of whom are software engineers.
What has not happened yet?
First, the whole market was looking forward to the launch of large-scale privatization in Ukraine. Unfortunately, this has not happened yet, though a new round in the sale of the Odesa Port Plant is planned for the end of this year. Privatization of enterprises in the energy sector is also postponed at the end of this or next year. Privatization of the Ukrspirt Multi-Unit Enterprise is actively discussed, but it has not yet started. Certainly, there are number of reasons but, after all, we would like to see some successful privatizations in coming months.
Secondly, the bulk sale of assets by the Deposit Insurance Fund of Ukraine has not yet begun, although this body has currently accumulated a vast amount of assets from liquidated banks. Nevertheless, the Fund has already carried out active work on making an inventory of available assets and, according to comments from its top officials, is actively engaged in establishing transparent mechanisms of assets sale through auction sites, including through the ProZorro System.
We can distinguish two groups as being among the factors that limit activities in mergers and acquisitions: economic and psychological.
The low purchasing power of most domestic investors, as well as the lack of high-quality assets for sale should be noted among the economic factors. It is a paradox to some extent, which repeats the situation of 2009, when many enterprises became insolvent, but their owners didn't want to sell them at the real market price. However, unlike the last crisis, Ukrainian banks are now more aggressive and ready to foreclose on pledged assets. Therefore, it is pleasant that legislation on bankruptcy and financial restructuring is actively developing in Ukraine.
The absolute limiting factor is the restraining effect of currency restrictions in the country. However, the gradual easing of these restrictions was a positive step; in particular, the possibility of partial payment of dividends appeared.
There are a number of shortcomings in the procedure of purchase of the rights on loans that limit the free sale of overdue loans in some way and serve as a limiting factor for foreign investors.
As for psychological factors, the constant fear of corruption in Ukrainian courts prevails here, which, however, can gradually vanish in case of successful implementation of judicial reform in the country.
Unfortunately, the tense situation in the ATO zone, in Crimea and the potential threat of Russian aggression are still a big factor of pressure. However, Ukrainian investors have already reconciled themselves to this factor and foreign investors are getting gradually used to it.
There have been many positive changes in the legislative environment over the last year, which have also affected the market of mergers and acquisitions. The following improvements should be noted here:
— significant reduction in regulatory requirements in Ukraine;
— increases in thresholds for concentration, combined with their improvement;
— coming into force of amendments to the Law "On Joint-Stock Companies" from May 1, 2016;
— cancellation of need for registration of foreign investments in Ukraine;
— adoption of legislative changes in the fight against corporate raiding, in particular introduction of obligatory notarization of the signature on documents on change of director or membership of board.
Let's also note the raft of draft bills that are under consideration in Parliament, particularly the draft law on limited liability companies, the draft law on corporate agreements and the draft law on squeeze out/sell out of minority shareholders. Adoption of these draft bills will qualitatively increase the level of corporate legislation in Ukraine.