M&A deals in 2023: prospects and possible solutions

M&A (mergers and acquisitions) is a combination of assets of two legal entities. In essence, such transactions are a process of transferring or consolidating assets and operating divisions of one firm with another organization. This helps to optimize part of the business in order to find more favorable conditions for strategic management and further growth of the enterprise. 

Despite the fact that the very definition of M&A (mergers and acquisitions) contains two types of process – merger and acquisition, this type of transaction is understood as a variety of actions for the reorganization of legal entities:

• merger;
• joining;
• separation;
• highlighting and others. 

As we noted earlier, in the vast majority of cases, such transactions occur between two companies.

Objectives of any M&A transaction

Of course, the goal of any transaction is to achieve certain financial indicators, as well as business development or expansion of the geography of presence. And M&A is no exception here. However, any M&A transaction has its own specific goals, which are:

• Increasing the value of the company. When the assets of two organizations are combined, their total value increases by two or even several times. This advantage is very important for the subsequent sale of the company or in terms of attracting investment. 
• Accelerated growth and development of the organization. In some cases, when the company has reached the “ceiling” of its growth, the merger of the two companies will help restore the development process. 
• Capturing a larger market share, which will lead to an increase in the firm’s influence in the occupied industry. 
• Combining scientific achievements obtained by each of the companies separately. 
• Diversification of securities issued by the company. 
• If a company with a higher profit per share absorbs a company with a lower profit per share, then the total profit per share becomes higher. 
• Opportunities to apply tax benefits and preferences or reduce tax liabilities by paying zero VAT or increasing the share of expenses. 
• Opportunities to acquire a company with financial difficulties at a cheap price in order to “unlock” its assets for subsequent profit. 
• Improving their positions on international trading platforms. 
• Increasing the list of goods or services that the combined companies can offer to their customers. 
• Opportunities to start producing a new product by obtaining new production opportunities. 
• Optimization of business processes by discarding duplicate departments or processes. 
• Opportunities to purchase raw materials in bulk at a lower cost.
• Opportunities to expand the business to new regions of presence. 
• Buying competing companies and, as a consequence, increasing its influence in the industry. 
• The growth of business reputation in the market. 

What happened in the field of M&A transactions in 2022

Due to the political situation in Russia and in the world, the economic situation in our country is changing a lot. This was also reflected in the market of M&A transactions.

Many Western companies voluntarily or involuntarily suspend and sell, as well as transfer their Russian branches and subsidiaries. This has never happened before in history, and therefore firms have to react quickly and find optimal solutions. 

In order to improve the situation on the market of M&A transactions in 2022, the parliament approved a bill allowing the sale of a business worth up to 2 billion rubles without the permission of the antimonopoly authorities. Prior to that, transactions with shares, shares and property of companies were subject to preliminary approval with the Federal Antimonopoly Service (FAS) if the total value of assets exceeded 800 million rubles. The law increased the size of transactions subject to approval to 2 billion rubles. As a result, when making such contracts in 2022, a simplified procedure for making transactions was already in effect.

Companies are trying to exit their assets fairly quickly and as quickly as possible. Such a sharp departure for foreign companies turns into losses. In some cases, the decision to withdraw is due to the termination of shops and production. Thus, by sacrificing a small share of sales that fall on Russia, foreigners retain the bulk of their business in other countries. In some cases, the governments of some states promise to compensate the losses of compatriots in connection with the closure of business in Russia. For example, a similar statement was made by the Government of Finland.

The departure of foreign companies could not but affect the number of mergers and acquisitions – there were significantly more of them. For example, in the first half of 2022, the volume of the M&A transactions market increased by 5.6% to $18.1 billion.

In general, 2022 has defined a new trend in the M&A market – business consolidation. Last year, many agreements that were considered promising in the real sector of the economy were put on pause. Some of the deals that were in the process of closing were postponed to 2023. In such a situation, there is a tendency to strengthen large networks. Larger market participants continue to buy up those who are significantly smaller than them.

Also, 2022 marked a trend towards changing the geography of investors due to the presence of investment risks. It is quite predictable that the most active investors are now working in the IT sector. As for the interest in buying domestic assets in other directions, investors from China, Turkey, and the United Arab Emirates are showing interest here. European investors, with whom Russia has been cooperating well in recent years, have reduced their activity. Beneficiaries are also considering business relocation options in case of unforeseen circumstances. 

M&A deals: prospects in 2023

The end of 2022 showed that the trend towards initiating mass M&A transactions will continue in 2023, however, with some differences. In particular, investors do not expect panic and haste when merging companies. The second half of 2022 allowed investors to stop and think in which direction it is better to move. Among other trends in 2023 , we can note:

• Increase in the number of closed transactions. In 2022, due to the great excitement and confusion, some of the transactions were not closed due to changes in a number of conditions. As mentioned above, in the new year, investors will have time to think carefully about the final terms in order to bring the deal to the signing of the agreement. 
• Fewer discounts. Due to the need to quickly leave the Russian market, many foreign companies tried to sell assets at a good discount. In 2023, there will be noticeably fewer such generous offers. 
• Reducing the number of “fast” transactions. This trend follows from the conditions of the previous paragraph: investors no longer need to hurry. 
• Maintaining the trend of selling the business with the possibility of subsequent redemption. This situation turned out to be a trend in 2022, when the owners of a number of foreign companies sold the business to their closest Russian competitors with a right of redemption clause for 5-10 years. 
• Increase in the number of transactions going through the government commission. Legislative changes introduced at the beginning of 2022 prescribe that all transactions with residents from unfriendly countries should be conducted through a special government commission. This increases the merge time by 3-4 months and in some cases reduces the price. 
• Reorientation of M&A transactions with Russian assets towards friendly countries – China, Turkey and the UAE. However, the main buyers of Russian companies will still be domestic entrepreneurs. 
• The trend towards the absorption of smaller firms by large Russian companies will continue. 
• Reduction of venture investors to Russian high-tech startups. 

In general, there has been stagnation in the Russian market of M&A transactions, which will continue for a certain long time. Trends in mergers and acquisitions of companies will shift towards the domestic market with a decrease in interest from foreign investors from unfriendly countries.