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Pessimism Fails to Fluster: Emerging Europe Enjoys Another Stellar Year of M&A Growth in 2017

Pessimism Fails to Fluster: Emerging Europe Enjoys Another Stellar Year of M&A Growth in 2017

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Investors had reason to be apprehensive about the prospects of Emerging European markets at the outset of 2017: protracted Brexit negotiations hung a cloud over Europe; Eurosceptic parties were widely expected to succeed in imminent elections; and anti-immigration and nationalistic sentiments reared their ugly head.  

Yet, due to the growing confidence in the region and prevailing strength of the markets, it was not long before such concerns evaporated and uncertainty proved to be no match for the continuing allure of investment in CEE, which bore fruit with a 6% increase in deal activity in 2017, according to the latest CMS Emerging Europe M&A Report.

The consistent theme across Emerging Europe in 2017 was the failure of the pessimistic outlook to materialize. This was epitomized in Hungary, where it was widely reported that government initiatives might repel inbound investment and thwart M&A activity. These concerns were clearly not borne out, as Hungary in fact experienced a 126% increase in deal value and a healthy increase on activity year on year. Also telling were the results in Romania, which enjoyed a 13% increase in deal volume and 64% increase in value over 2016 figures. Meanwhile in Poland, despite forecasts of a collapse in investment appetite, deal numbers remained at the healthy levels of 2016.

With respect to the countries with more turbulent political environments, it is interesting to note the recent activity in Ukraine and Turkey. Despite a minor decrease in overall deal value, Ukraine had a remarkable surge in activity – an increase from 54 to 90 deals in 2017 – as confidence continued to return since the annexation of Crimea. Meanwhile, Turkey witnessed an increase from 183 to 204 deals, while deal value increased by 46%. Experience demonstrates that fluctuations in deal activity in markets tend to be much more revealing than changes in overall deal value, for the latter is prone to misrepresentation due to the presence or absence of mega-deals. On this basis, then, the figures for Ukraine and Turkey are encouraging.      

The health and growing stability of economies throughout the region has not gone unnoticed by foreign markets. In particular, it is clear that shrewd Chinese investors, who have previously remained patient as they gauged the levels of predictability and potential in Emerging Europe, have changed their strategy. The thrilling and bolstering levels of Chinese inbound activity is now so strong, it can no longer be said they are taking a dive into CEE, but rather they are now swimming in the market, searching for the pearls and reaping the rewards. The recent figures certainly back this up, as 2017 saw a 78% increase of Chinese investment in the region – particularly noteworthy on top of the previous rise of 96% in 2016. This placed China clearly above US as the largest investor in the region. 

There are no signs of this trend waning, and there is good reason to expect a further increase of Chinese investment – likely to be in excess of 50% – for 2018. Notably, the gap in the level of Chinese investment in greenfield projects still persists, but there are indications that due to the region’s steady growth, Chinese fears concerning volatility and the perceived risk of CEE markets have disappeared and have been replaced by enthusiasm about viable, reliable, and profitable financial opportunities. This is also mirrored in the recent growth of interest in the markets from other jurisdictions in Asia, including Japan, South Korea, India, and – more recently – across the broader Middle East. 

It is hard to put forward an all-encompassing explanation for the attitudinal shifts towards Emerging Europe. Yet, it can be said that the boundaries between market maturity in Western, Central, and Eastern Europe are increasingly unclear and the very term “CEE” has become anachronistic to some extent. The suggestion of an intrinsic bond in markets between CEE countries is outdated. While there was relative symmetry between the market maturities in CEE countries in the immediate post-communist era, they have since developed at significantly different rates and are now much more diverse. Moreover, the bridge between Poland and the Czech Republic in particular – and, recently, Romania and Hungary – and Western Europe has become increasingly blurred. Indeed, there are now examples of high-profile private equity funds which have closed their dedicated CEE offices and operations on the grounds that the delineation of many of the CEE markets from Western European counterparts is no longer applicable.     

It remains to be seen if the enthusiasm for investment in the region will continue to grow, but early signs are pointing to another solid year of activity. Confidence and endeavor has seemingly replaced hesitance as savvy investors ruthlessly pinpoint undervalued targets. Yet a consequence of this is sellers are now the ones calling the shots.

By Helen Rodwell, Managing Partner, CMS Prague, and Radivoje Petrikic, Partner, CMS Vienna, and Managing Partner, CMS Belgrade

This Article was originally published in Issue 5.2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

CMS at a Glance

CMS Sofia is a full-service law firm, the largest international law firm in Bulgaria and one of the largest providers of legal services in the local market as a whole. The breadth and depth of our practice means that our lawyers are specialised, with a level of specialisation that few of our competitors can match.

CMS Sofia is the Bulgarian branch of CMS, a top ten global legal and tax services provider with over 5000 lawyers in 43 countries and 78 offices across the world.

CMS entered the Bulgarian market as one of the first internationally active law firms in 2005 and is now among the most respected legal advisors in the country. We have 7 partners, 4 counsel and over 30 lawyers in our office in Sofia.

Our legal experts, who are rooted in Bulgaria’s local culture, can also draw on years of experience in foreign countries and are at home in several legal systems at once. We know the particularities of the local market just as well as the needs of our clients and combine both to achieve optimum solutions. Our lawyers are Bulgarian qualified and we also have English qualified experts – all of them regularly working on cross-border mandates.

In our work, we focus on M&A, Energy, Projects and Construction, Banking and Finance, Real Estate, Media, IP and IT law, Tax, Employment law, Competition, Procurement and any kind of Dispute resolution, including arbitration and mediation. What’s more, we also take care of the entire legal management of our clients’ projects.

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