Estonian Ambassador Toomas Kukk said large amounts of cash was looking for opportunities in the Baltics. As a diplomat and salesperson for his country and the region, his bets would be on investing locally. His wishes may have found some echo with the speakers, albeit for different reasons.
Figures compiled by KPMG show a worldwide 30% increase in the value of deals in 2015. Ten of those mergers even exceeded USD50 billion, with eight of those involving US companies. Most of these deals where value-driven rather than for tax optimisation. Labelling it a “sellers’ market”, KPMG predicts both an appetite and capacity for further growth in M&A. Fuelled by near-zero or negative interest rates, large companies such as Google now prefer faster expansion through acquisition rather than slower R&D induced organic growth.
While most the world saw a substantial increase in volume and size of mergers, Lithuania saw a substantial decrease in activity. The merger of Teo with Omnitel stands out, as are the acquisition of Bite, in the communication business and Šiaulių Bankas merger with Finasta and parts of loan portfolio of bankrupt Snoras Banks in the financial sector. These are part of 66 deals, down from 116 in the previous year. Although there was a drop across the board, foreign companies buying Lithuanian companies saw the biggest drop since 2013. Efficiency (Teo) and growth (Šiaulių Bankas) are some of the main drivers in the merger world that has seen increasingly costlier takeover targets.
KPMG’s Darius Klimašauskas pointed that “buying growth” is part of the trend that he sees for 2016 as organic growth remains anaemic. The IMF predicted that strongest growth in Europe was concentrated in Central Europe and the Baltic States. However, even the 3.3% growth predicted by the IMF for 2016 in Lithuania stands in stark contrast with growth just a decade ago. Mr. Klimašauskas showed that recent surveys in the corporate world show that acquisitions are not without risk. The quest for synergies, including overlooking critical factors such as “fit” between companies and their cultures are among the leading contributors to failure. Paying attention to fundamentals is also seen as part of the trend in 2016, as the macro-economic environment is becoming increasingly difficult and markets have started in very negative territory.
That may make it also a challenging year for Lithuanian start-ups, such as Pixelmator, Vinted, CG Trader and Trafi, that may be looking for additional financing or a possible exit. Unfortunately, these companies are still looking at low multiples of earnings (EBITDA) compared to publicly listed companies. Five times earning still seems the norm against 20 times and higher for Nasdaq listed firms making possible exits far less lucrative.
During his presentation, Aare Tammemäe of Redgate Capital in Estonia showed that Lithuania was substantially less active in the regional corporate bond market. Although a relatively small sub set of the global market, most of the regional bonds appeared more akin to junk bond status with interest (coupon) rates around 10%. Mr. Tammemäe attributed that more to the size of companies rather than their credit worthiness.
Speaking to the Lithuania Tribune afterwards, he said that although Lithuania was less present than Latvia or Estonia, there are numerous opportunities in the future. “The government could sent a strong signal,” said Aare Tammemäe, “privatising some of the companies still under state control, such as the port of Klaipėda and the energy grid would create opportunities for pension funds and large investors.”
“That would also provide an opportunity for investors to look at other investments in the country,” he added.
Privatisation would probably require a change in government as Šarūnas Šiugžda of LitCapital pointed out in frustration during his presentation. Mr. Šiugžda sees improved activity in the future for companies in the Baltics with Private Equity and Venture Capitalists leading the way. He expects that the low multiples paid for start-ups have a long way to go before converging with global standards.
The last speaker, Karolis Pocius, partner with M&A International Baltics, was more subdued in his outlook for 2016. Even though he still sees moderate global GDP growth and continuous growth in technology, he sees declining equity markets, reduced appetite for bond financing and CEO’s becoming less optimistic in 2016. Increased Fed rates will negatively impact M&A and corporate activity. However, Mr. Pocius is more optimistic about Europe, which lags behind the USA by about two years and so there is room for moderate growth in the coming years.
During the presentations, Inga Miliauskienė of the Lithuanian Private Equity and Venture Capital Association provided an overview of success factors for incubators an Start-ups in Sweden, Finland and Norway.