Interview with Peter Vanhecke
Russia Today: What is driving the growth in M&A activity involving Russian companies – both domestically and internationally?
Peter Vanhecke: I think against the backdrop of strong macro-economic fundamentals it’s almost a perfect storm for M&A. And I would like to touch upon briefly some of the major drivers of that.
First, there’s a domestic driver. A lot of the sectors in Russia are, I would say, in the second phase of consolidation – the first one being organic growth and maybe some access of the market leaders to the capital markets. In the second phase you actually have two effects. Firstly, local market leaders are looking to consolidate their market position through the funds they raised in an IPO, and they either buy local competitors or turn abroad to buy assets there. Secondly, foreign groups target the local market leaders – these have become much more attractive as they have market shares in hands.
The second element is international trends. Russia cannot escape international market developments. I can refer to the metals and mining sector, for example, characterised by the world-wide consolidation going on. This does not pass by Russia. So Russian players want to participate – again, either by buying local competitors or buying assets abroad. Severstal, for instance, bought assets in the U.S.
The third component is the position of the Russian state. They have identified a limited group of sectors in which it is desirable to have national champions. Again, that supports and drives M&A in those sectors.
RT: Do you think mergers and acquisitions activity is more sector specific?
P. V.: No. Clearly, it’s an overall trend. I refer to the macro-economic background to this. Still, every sector has its own specifics. Obviously, strategic sectors such as oil and gas or metals and mining will have a different component to consumer and retail sectors. Another point I would like to noteis the increased activity of private equity funds. Private equity firms have been drivers of M&A in Europe and the U.S. for the last 12 months to two years, and they have been strong players. In Russia they are starting to emerge as players. It’s a trend we expect to grow if the debt markets stabilise of course.
RT: So what is the current trend: is it larger companies increasing the M&A activities or is this a characteristic of smaller companies as well?
P.V.: If you look at the last three years, M&A has been dominated by large deals; oil and gas is a good example. A couple of huge deals created most of the value in M&A. Meanwhile, small and mid-size companies are becoming increasingly active in M&A, and again private equity plays a supporting role in that trend.
RT: Most of Russia's cross-border M&A activity currently involves Western companies. Is that likely to change in favour of Asian companies?
P.V.: In terms of inbound cross-border activities I think it is Western Europe and the U.S. that took the biggest chunk of M&A. What we see in the outbound cross-border activities is that it’s growing basically in the same directions. Obviously, with the emergence of China and the Chinese economy and some of the Russian borders being close to Asian markets, we would expect some growth. But the bulk of the M&A activity will still be with Europe and the U.S.
RT: How safe it is to do business in Russia? Do foreign companies feel safer about buying elsewhere than in Russia?
P.V.: Obviously, Russia is an emerging economy. I think there’s been huge progress made in the field of corporate finance and transparency. So some of these fears have been moved away. Also, when I speak to my clients I see a big difference between people who make their first or second investment in Russia and those who are not present in the market yet. The first category tends to be more relaxed as they know how to operate within Russia. The second category is susceptible to influence by press reports in their own country, which do not always reflect correctly the situation within Russia. Every country has its own M&A barriers and difficulties, but as long as you know how to work with those, you can cope with them.
RT: Do you expect more mergers and acquisitions in the Russian market?
P.V.: Yes, in the last two years growth has been more or less 50% and we expect the same to happen in 2007.