Economic sciences/4. Investment activity and stock markets

Postgraduate Kateryna Lagutina

Taras Shevchenko National University of Kyiv, Ukraine

Newest trends of M&A market in Ukraine

Mergers and acquisitions are integral processes of modern economy. Companies worldwide are in the situation of choice of two different development models: 1) systematic growth by expanding own production capacity, 2) active growth by mergers and acquisitions of other companies. The first model is more conservative, the second one – is associated with greater risk, but it can significantly increase the financial potential of the company.

First of all it is viable to articulate the basic concepts such as “merger” and “acquisition”. In economic science mergers and acquisitions (M&A) is a general term for a group of financial transactions purpose of which is to join companies into one entity for obtaining competitive advantages and maximizing the value of the newly formed company in long term [1].

The consequences of typical merger are: cessation activities of one or all companies, creation of a new legal entity, transfer of all assets and liabilities between companies, automatic turning of shareholders of the seller and the buyer into the shareholders of new company, exchange shares of companies that cease their activities to the shares of successor [3].

In terms of current post-crisis recovery of the economy backgrounds for the expansion of M&A market are growing. Assets of companies during the crisis were impaired, so now they can be bought at prices below market. At the same time the possibilities to capture property (unfriendly "hostile" takeovers) become easier. Mergers and acquisitions in crisis bankruptcy of selling companies are also simplified. In this case, after the establishment of corporate control additional share issue is carried out, that assumes participation of new owners and investors.

M&A-market is the most effective when its participants are open (public) joint stock companies. Law of Ukraine "On Joint Stock Companies", which entered into force on 29.04.2009, legally started the transition in the domestic economy from open and closed to the public and private joint stock companies.

An important component of the mechanism of mergers and acquisitions is selection of program of their implementation. It is essential to distinguish between, firstly, the process of developing a program of merger (acquisition), and secondly – the process of implementing this program. In the process of developing a program of merger (acquisition) the company, which absorbs, must pre-estimate the value of cash flows from future merger. The purchasing company should also evaluate what effect this merger will have to the desired level of income (profit rate), if it happens. The absorbing company should decide how to pay for the merger – in cash, in some other way or by stock of securities. Evaluating the profit from the merger, the management of both companies, which absorbs and is absorbed, and all shareholders must agree how to allocate this income. Analysis required for this assessment can be very complex.

Best practices in preparation for the merger and acquisition are now sifting of international and domestic experience, involving legal and financial advisors, searching for successful political and economic moment etc. [4] In the absence of transparent and complete information on state of M&A-market and stock market adequate preparation for the acts of mergers and acquisitions is impossible.

While developing the program of merger (acquisition) buying company identifies potential target company, assesses assets (shares) of the target company. In most cases, this assessment on undeveloped stock market as in Ukraine is accompanied by the use of insider information on the state of target company. During the assessment buying company identifies potential synergies, the level of managerial efficiency in the target company and others. It is believed that the main purpose of assessment in conditions of the Ukrainian economy is to reveal hidden discount to market value of the target company, that is, determining how this company is underestimated by the market. In real situations that arise in mergers, buying company often seeks the services of consulting firms to assist in assessing the value of the target company.

As the statistics illustrate, in 2011 the volume of reported M&A deals in Ukraine was at its lowest since 2008, and the total value of those deals – although higher than the lowest point in 2009 (when the economic crisis was at its worst) – was significantly lower than in 2010 [2].

Deals by Value and Volume in Ukraine (2008-2011)

Some significant cross-border transactions took place in 2011, not the least of which was the nearly €1 billion privatisation of Ukrtelecom, the state-owned fixed line telephone monopoly, by EPIC.

Top 5 M&A Deals in Ukraine (2011)

Target Company	Industry	Deal Type	Buyer	Country of Buyer	Deal Value (€m)
Ukrtelecom	Telecom & IT	Privatisation	EPIC	Austria	950
Azot	Manufacturing	Acquisition (95.63%)	Group DF	Ukraine	580
Donetsk ElectroMetallurgical Works	Manufacturing	Acquisition (100%)	Mechel Steel Group	Russia	410
Severodonetsky Azot	Manufacturing	Acquisition (100%)	Group DF	Ukraine	370
Nadra Bank	Finance & Insurance	Acquisition (89.97%)	Dmitry Firtash; Ivan Fursin	Ukraine	304

Although a fair amount of the other transactions that occurred could technically be classified as cross-border, by far the majority of all transactions in 2011 were in fact among Ukrainian and/or Russian buyers and sellers, whether acting through their foreign holding companies or locally [2].

Renewal of business activity in Ukraine is connected with the increase in liquidity that has taken a significant impact on financing mergers and acquisitions. In the market of corporate M&A loan bank capital is widely used as well as financial market instruments that have become cheaper and more accessible. The main trend of M&A market in Ukraine is associated with increased liquidity of financial markets and increasing access to capital.

Up-to-date trends in institutional development of M&A market in Ukraine are determined by mismatch between the traditional means of accumulating financial resources in the process of mergers and acquisitions, and new specific financial motives of their implementation; between civilized instruments of distribution and redistribution of financial resources between entities through mergers and acquisitions, and atypical forms of their realization (with the active participation of offshore business, significant influence of government structures); between the need of ensuring transparency of intents of participants of mergers and acquisitions, and expansion of non-transparent forms and methods of redistribution of ownership rights and control on financial flows in the domestic corporate sector, between the need in expanding the role of stock market in the implementation of mergers and acquisitions, and low investment attractiveness of shares of Ukrainian companies.

References:

1. Depamphilis D. Mergers, Acquisitions, and other Restructuring Activities. 1^st ed. / D. Depamphilis. – San Diego: Academic Press, 2001. 643 p.

2. Emerging Europe: M&A Report 2011. CMS and Emerging Markets Information Service (EMIS) DealWatch, 2012; http://www.securities.com/tag/emerging-europe-report#page=page-1.

3. Gaughan P.A. Mergers, Acquisitions, and Corporate Restructurings. 3nd ed. / P.A. Gaughan. – John Wiley & Sons, 2002. 612 p.

4. Robinson S. The Mergers and Acquisitions Review. Fourth edition / S. Robinson. – Law Business Research Ltd. London, 2010. 520 p.