MERGERS &
ACQUISITIONS
Q&A
While the global economic slow-down reaches the Baltic region
bruising its housing and retail markets badly, the hope for IT
business is hopeful, according to one of the countries’ top M&A
specialists, Toomas Prangli from Sorainen. He says that although the region is past the
biggest wave of geographic expansion, Baltic IT has a bright future to look forward to.
You say that 2008 will be a year of strategic buyers as financial investors are facing
difficulties in leveraging their ventures. Is the credit crunch not going to lessen
foreign investment in the region overall?
I think that the effect of such global trends on the small and still emerging markets
like the Baltic region is exaggerated. The local salaries keep catching up with the
Western Europe at the pace of around 10% per annum, thus enabling the borrowers to
pay back housing loans. The GDP growth is expected to be between 4-6% in 2008.
Lithuanian market stands still very strong. Estonian economy is expected to come out of the slowdown phase
by the end of 2008. Latvian situation is a bit more complicated but not catastrophic by any means. Foreign
investors are definitely keeping close look at the macro-economic developments in the Baltic countries. They
also now consider all projects more carefully on individual business level. In Sorainen, we see that more M&A
projects have been put on hold in the due diligence phase. Whilst such careful investigation delays or prolongs
some transactions, we have not seen notable lessening of foreign investment except for the real estate sector.
Our M&A and Finance Teams have been even more busy in 2008 than in the beginning of 2007.
What are the strongest areas of business in the Baltic market at the moment?
Baltic IT sector is still attractive due to its good and innovative knowledge base. Real estate and retail sectors
are probably the most vulnerable markets in the current situation.
What problems do you see?
Many inefficient businesses that have taken unreasonable risks face insolvency. Investors should assess the
financial situation of their counter party more carefully. In general, however, the current trends are healthy
for the market. Many of the bankruptcy cases will probably affect the businesses that should never have been
there in the first place. In the recent years, it was too easy to make money. Some businessmen forgot that
markets are cyclic. Companies with good business plans but with liquidity or solvency issues are good M&A
targets, both by strategic investors as well as by distressed debt buyout funds – the new private equity trend.
Another problem is finding leverage for the transaction. However, here we should consider that Baltic M&A
transactions are comparatively small in global standards. This is one of the reasons why acquisition finance has
historically been very low.
How dependent is the Baltic IT market on foreign investment?
Baltic IT has proven to be very innovative and successful on global scale. The most famous example of this
is the Estonian company Skype. The small size of Baltic countries plays a big advantage for the IT business. It
is here where many e- and m-services can be tested without extraordinary costs, and Baltic people are eager
to try out new ideas. Once the project is successful, the same application can be put on much larger foreign
markets. This is when foreign investment plays an important role. Along with foreign investment, Baltic IT
businesses also need management know-how and international marketing channels.
How strong is the growth of local businesses in the Baltic region and what is
happening to the growth rate at the moment?
The growth is currently slowing down but despite of this the Baltic markets are still growing much faster than
the ‘old’ European markets. However, the small size of the Baltic markets will probably still not justify big
M&A and private equity players to establish their permanent presence in the region. They will keep monitoring
the markets and step in for larger transactions. Baltic foreign trade balance has been unhealthily negative and
M&A deal flow has mostly been a one-way street into Baltic countries. However, we see more and more Baltic
companies looking to expand by M&A abroad. This trend will become more apparent during coming years.
What will be the region’s position in relation to global markets?
The rapid increase of labour costs means that Baltic companies are no more suitable for low-value
subcontracting and labour-intense work. Due to the problems with Russia, Baltic countries also need
to reposition themselves from being a transit economy. They are now focusing more on developing the
technology sector. Evidence of this is the Estonian government’s decision not to let the cut-downs in the
general budget of 2008 affect public investment in technology and innovation. In my view, this is an extremely
smart decision.
14 8020 EUROPA JUNE 2008
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