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M&A Market Value Grows in 2016, Despite Fewer Signed Deals

Although the number of deals the Hungarian mergers and acquisitions market saw dropped in 2016, the estimated value was slightly up compared to the previous years, according to the latest M&A Barometer published by EY on March 9. Margaret Dezse, partner of Transaction Advisory Services at EY Hungary, discussed the positive trends seen in the market with the Budapest Business Journal.

Margaret Dezse, partner of Transaction Advisory Services at EY Hungary.

The number of signed M&A deals in the Hungarian market in 2016 dropped significantly to 110 from the preceding year’s 130, which is a 15% decline, according to EY. That said, 2015 was outstanding in terms of deals signed, and even with the drop, 2016 was the second most active period in terms of the number of publicly disclosed transactions since 2012. “We consider it as normal fluctuation, however, JEREMIE [EU funding for SMEs] deals did slow down and that was indeed the major factor,” Dezse tells the BBJ. “We do not foresee lower M&A activity for the future since our companies are healthy and attractive for investors,” she adds. 

The estimated value of the M&A market was put at USD 1.61 billion, a 6% increase when compared to 2015. Albeit at a slower rate, market size has been growing since 2013, when the plummeting tendency of preceding years finally stopped. Last year’s growth was mainly driven by the increase in average deal size, with disclosed deal value below USD 100 million increasing by 19% to USD 8.7 mln in 2016 from USD 7.3 mln in 2015, according to EY.

Commenting on the dropping number of deals but growing overall value, Dezse noted that deals are homogenous neither in type nor in size. “This means that even with a lower number of deals one or two large transactions can boost the value and, as a result, the market grows. It is important, however, that in the last seven years – since we have issued our M&A Barometer – we see stable growth on the Hungarian M&A market in terms of deal numbers. It might be a slight decrease on a year-to-year basis, but the trend shows us steady growth,” Dezse explains.

Domestic Dominance 

Following the tendency observed in previous years, the Hungarian market was dominated by domestic transactions in 2016. In 54% of the deals, both the target and buyer were Hungarian entities, while foreign inbound investments arrived from Austria (six deals), the USA (five), Germany and Czech Republic (four each), and Italy and Romania (three each). Additionally, ten publicly disclosed outbound transactions were noted in 2016, three of them executed in Poland.

The dominance of local deals seems to be characteristic of the Hungarian market, but more FDI is entering the market. “The share of inbound transactions has been continuously increasing for three years; this is clear evidence that we have attractive and healthy companies that do tempt foreign investors,” Dezse says.

In line with previous years, financial investors were in the minority, and the limited availability of European Union funds appears to limit this market as well. A decline in the number of financial transactions was due to the lower activity of JEREMIE investors now that investment period has come to the end. The share of strategic buyers increased to 68% of the total deal number in 2016, up from 62% in 2015, EY notes.

Manufacturing and Services 

In what seems to be an unfolding changing trend, the IT sector last year lost its crown to manufacturing and services, as far as the number of deals is concerned. The manufacturing sector saw a total of 15 deals in 2016 (up from 12 in 2015), with an average deal value of USD 5.4 mln. 

“Manufacturing and services have always been amongst the top sectors in terms of deal value and as such we have no doubt that they will keep their strong position. However, IT is the future and a rapidly growing platform to invest in. It has probably secured its position in the long run,” Dezse comments.

With a total of 13 deals, the services sector was up by 63% in 2015 compared to the previous year. In 11 transactions target companies were Hungarian entities and ten of those transactions were closed by domestic investors.

 The IT sector, despite losing top spot, still remained an important player of the market with 12 deals in 2016. Average deal value in the sector was USD 27.3 mln, representing a significant increase from USD 9.4 mln in 2015. The sector was characterized equally by strategic and financial investors.

The real estate sector, which has been reviving recently and is facing huge expectations by professionals in the CEE bloc, saw 12 transactions in 2016, going head-to-head with the IT. Inbound transactions by strategic investors amounted to more than 50% of the total deal volume. The average deal value based on four disclosed transaction values was USD 83 mln.

“The stronger position of the real estate sector has been already seen. The number of deals tripled last year from four in 2015 to 12 in 2016. This high level of activity can be maintained over the next few years, but it might not take over the leading position,” Dezse forecasts.

The telecom and media sector as well as the banking and financial services sector each saw 12 deals in 2016. In ten of the telco and media transactions, both the target companies and buyers were Hungarian entities. Two-thirds of the transactions were closed by strategic buyers investing mainly in digital media companies.

The banking and financial services sector saw the biggest jump in deals in 2016. In 58% of the transactions both the target and buyer companies were domestic players. The total size of the sector was not estimated as no deal values were disclosed.