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M&A activity picks up in 2014

Consultancy EY notes an increase in mergers and acquisitions in Hungary. We asked Margaret Dezse, partner and head of transaction advisory services at EY Hungary, to explain what it all means.

While activity has not yet reached pre-crisis levels, mergers and acquisitions in Hungary seem to be regaining steam; M&A grew 12% in volume last year, making this the fifth most active of 11 countries in the region in 2014, transaction and advisory services firm EY Hungary said during the March 19 presentation of the findings of its annual M&A Barometer.

The 102 M&A deals made in Hungary in 2014 represented a 12% increase on the previous year, EY said, adding that the value of those deals grew from $1.27 billion to $1.49 bln, an increase of 18% in a year. This is still far from the value reached in 2010, when the 90 M&A deals recorded in Hungary were worth a total of $2.5 bln.

According to EY, domestic transactions were the most important, accounting for 61% of Hungary’s M&A activity in 2014, as compared to 59% in 2013. Of the foreign partners, most came from the United States, Germany and the UK. As for sectors, IT was the dominant area for M&A activity, accounting for 33% of the deals in Hungary last year, EY reported.

To find out what these numbers mean in practice, the Budapest Business Journal spoke with Margaret Dezse, partner and head of Transaction Advisory Services at EY Hungary.

There has been a positive trend in M&A in Hungary since 2012. What does this mean for the Hungarian economy?

M&A activity does not necessarily have a direct relationship with the overall performance of a particular economy. However, where there are willing buyers and sellers there is a market, and thus a positive impact on the economy. As such, usually an increase in appetite for acquisitions reflects that the owners/managers have a positive outlook for the future.

One can draw a number of conclusions from the numbers. For example, the increasing proportion of local deals may reflect that there is an increasing volume of capital within the country, thus impetus for growth and acquisitions. On the other hand, a number of Western companies have also decided to focus on their core, home markets and have sold their businesses to domestic investors. An acquisition is usually beneficial for both the seller and the buyer and the main goal of each party is to create value in the end. The interest of foreign investors shows not only their trust in the target companies but also the macroeconomic environment, which increases confidence in the economy. Additionally, the activities of the EU’s JEREMIE funds create opportunities for Hungarian SMEs to enter international markets and become visible to global clients, therefore creating further jobs in Hungary.

M&A, despite its growth, is still below pre-crisis levels. Do you see a chance to outperform those figures in the upcoming years?

Indeed, we do see a positive trend, but continued growth depends not only on the Hungarian economy, but also the global economy. Nevertheless, in 2015, assuming that foreign investors continue to invest in the country and considering that 2015 is the last year for JEREMIE funds to invest their resources, there may be a further increase in the number of transactions in Hungary in 2015.

In the mid-term, the presence and relatively high number of financial investors among the acquirers may lead to further waves of transactions. Moreover, transactions related to the retirement of the first wave of Hungarian entrepreneurs may also lead to a further wave of M&A. However, it is difficult to estimate whether, or when, M&A activity will reach pre-crisis levels over the coming years.

The Hungarian state and state-owned companies were important players in last year’s M&A deals. How significant was their effect to the country’s overall performance?

Our Barometer excludes M&A transactions that are directly or indirectly related to the Hungarian government. These deals are low in number and generally do not directly impact or relate to the trends of the private-to-private M&A market or the country’s overall performance.

Most of the M&A activity seems to be in the IT sector. Is this a case of foreigners snapping up local startups, or do you see other factors driving this?

Mainly other factors. We see that the IT deals represent a healthy mix of various types of M&A transactions. It includes local JEREMIE as well as other types of local financial investors investing in to local businesses, foreign Private Equity making their first investment into the entire CEE region, and foreign global startup success stories acquiring Hungarian companies.

We may look at these deals from the sellers’ perspective also: sellers include local entrepreneurs, JEREMIE funds and the companies themselves (issuing new shares), some of which were already backed by JEREMIE funds.

All the buyer groups have different motivations, naturally. We believe the reason for a healthy deal flow is the existence of larger strategic deals in the country and the region, which raises the confidence of private equity investors to support local companies. Their increased investment appetite lays the ground for venture funds to make even earlier bets on some of the local prospects and try to work with them to take them to international playing grounds.

What makes Hungary an attractive place for a foreign firm to invest in?

Foreign investors consider various factors prior to making a decision on investing abroad. One such is that they would like to enter or enhance their presence in the Central and Eastern European market and Hungary fits in this strategy if there is a good and valuable asset to acquire. Also, we see financial investors looking for bolt-on acquisitions in the CEE region to mitigate their existing exposure to Russia and Ukraine, and Hungary represents a good match for this strategy. Another valuable aspect that makes Hungary and Hungarian companies attractive for investors is the talent available in the country. For example Hungary has high-quality engineering education not only in Budapest but in the countryside as well, which definitely drives the enhanced interest in IT and technology based companies. The cost of Hungarian engineers is still below Western European and U.S. salary levels, which is an important consideration for investors.