By Darius Klimašauskas

Last year the headlines of the M&A market were dominated by three transactions north of EUR 100 million, involving the exit of three of the largest investors – Gazprom, E.ON Ruhrgas International GmbH (both from Lietuvos Dujos and Amber Grid) and RSA Group (from Lietuvos Draudimas).

The market also saw the return of the beloved auction process – it had been a long time since we had seen a tightly run structured sales process with interest from dozens of high profile local and foreign investors (trade and financial buyers alike), extensive vendor due diligence, several parties being admitted into the negotiation stages, extensive negotiations including stapled warranty insurance (!), and strict adherence to a tight deadline. We saw this in the Cgates transaction, which was effectively closed in 2015 and hopefully will set a benchmark for transactions this year.

The market should remain active, as companies seek to grow and push forward their own agendas. Siauliu bankas should complete the acquisition of Finasta, KG Group will continue their expansion by purchasing feeds factory in Russia and possibly opening a new fertilizers factory in Lithuania, and typically we should see at least a few Lithuanian companies entering Latvia. Recent examples include Malsena, Linas Agro and Gemaga, who have in the past few years acquired Rīgas Dzirnavnieks, Kekava AS, and Inteka respectively. Some larger transactions are also expected, such as Mid Europa’s exit from BITE, but otherwise it is anyone’s guess how things will pan out.

Undoubtedly the main busy-bees in the market last year have been the local private equity and venture capital houses. Together combined, the likes of BaltCap, LitCapital, Practica, Verslo Angelu Fondas and Ilja Laurs’ led Nextury Ventures have been responsible for 14 transactions in 2014 and a further 2 in the first four months of 2015. Though these transactions are dwarfed in size when compared to the large cross-border M&A deals, ticket sizes of EUR 200 thousand to EUR 3 million still typically involve quite a lot of work for fund managers and consultants alike. A few of those deals have been done together with world-known funds, who have found the evolving start-up ecosystem a great place for new ideas. For example, Practica Capital was involved in three such deals in 2014: investment in CG Trader, 3D models virtual market, with Intel Capital, into Gudri Antis, an IT solutions start-up, with Kima Ventures and acquisition of Gifty, a corporate rewarding service, in partnership with On-Line Ventures. And with success stories like Vinted - new equity of USD 27 million from Insight Venture Partners, following up on Accel's initial EUR 5 million the previous year - who can blame them.

Will VC/PE funds remain active? You wouldn’t bet against them; with additional funding coming in from the European Investment Bank, and new names such as Livonia and BPM Capital coming to the market, this segment will remain hot. Increasingly they will start contributing to the market when time comes to exit, with a few deals already announced and more to come.

A key discussion point is the impact of the geopolitical developments regarding Ukraine and Russia. Will things develop further, and will this deter foreign companies’ interest in our region? Will this have an impact on the valuations of companies? So far we believe the effect has been limited, save for several collapsed transactions involving companies with direct exposure to those markets. This may prompt the exits of brave foreign entrepreneurs who had come into our market in the late 1990s and early 2000s – they may feel it is the right time to cash in on the value they have built up.

Finally, the role of the consultant may be changing. More and more we see that the boards of companies, especially listed companies or operating in a regulated market, turn to independent consultants to advise on M&A strategy, valuations and financing. Good corporate governance may be at the forefront of this, as executives seek to minimize the risk of important decisions and make sure they have covered all corners before giving the green light. Due diligence is becoming much more than a simple box-checking exercise, as we see buyers involve more and more of their own executives in M&A transactions (think marketing, sales, IT, human resources), making sure that everything is clear from day one and value erosion is minimized.

With that in mind, one can never be sure how the market will develop; but without doubt it is becoming a more complex and dynamic playing field, and it will definitely be interesting.

Mr Darius Klimašauskas is a Board member of the Lithuanian Association of Financial Analysts (FAA)

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