Eastern European Entry Into the E.U. Offers Modest Hope of an M&A Boost

As the European Union (E.U.) solidifies plans to include a number of Central and Eastern European countries to the trading bloc, a question on many dealmakers minds is whether the move will help revive m&a in those regions. The E.U. plans to allow the Baltic states of Estonia, Latvia, and Lithuania to join, as well as Cyprus, the Czech Republic, Hungary, Malta, Poland, Slovakia, and Slovenia, most likely in 2004. After a frenzy of joint venture and m&a activity throughout the 1990s, following the ending of the Cold War, dealmaking in those parts of Europe has eased in recent years due to the letup in privatization and the general slowdown in the global economy. “Most of the interesting companies are already privatized. The big companies that wanted to make big investments have already done their shopping,” says Michael Traem, the Managing Director of Central Europe for A.T. Kearney. Some experts on the region expect that E.U. enlargement into the former communist bloc will spur acquisitions there. They foresee a potential dealmaking surge since the region’s m&a market, as a percentage of the gross domestic product, is less than half than that of Western Europe, they note. Yet others, such as Traem, expect to see only modest activity as a result of E.U. enlargement. In his view, m&a would be centered mainly in Poland, Hungary, and the Czech Republic, in certain sectors that still offer opportunities for buyers and consolidators. As the candidate countries join the E.U., Traem believes that risk-averse mid-sized companies looking to make acquisitions will feel more at ease about doing deals in those countries and will be on the lookout for attractive investments, particularly in Hungary, Poland, and the Czech Republic. Nevertheless, deal pickings will be slimmer than they were several years ago, since those countries are some of the more mature m&a markets in the region. Traem, who is based in Germany and recently conferred with colleagues in Poland, Hungary, and the Czech Republic on the dealmaking outlook in their countries in the coming years, says that the sectors that offer the best investment and acquisition opportunities are telecommunications, utilities, pharmaceuticals, banking, insurance, and retail, and adds that his colleagues anticipate telecommunication consolidation among their three countries. In Poland and the Czech Republic, especially, the restructuring and consolidation of the banking industry will continue to attract cross-border mergers and acquisitions. And banks that have already made investments in the those countries, mainly German, Austrian, and French banks, will start consolidating their banking activities in Eastern Europe. “In addition, they will transfer the banking operations they have in their home countries into Eastern Europe, because of the lower operating costs in the region,” Traem states. Additionally, research conducted by Public Utilities Fortnightly shows that energy companies increasingly are targeting their Eastern European counterparts. The gas markets in Eastern and Central Europe – especially those in countries that are poised to join the E.U. – look especially promising. Other pockets of opportunity exist in the Czech Republic’s sophisticated manufacturing sector, which is adept at precision engineering of plastic and electronic products, and in Poland’s publishing industry, which caters to a large consumer population, notes Traem. Despite the m&a outlook, one thing that potential dealmakers eyeing the region must keep in mind, warns Traem, is that integration of companies in Eastern and Central Europe remains challenging. “Changing the mind-set of the employees is an issue. As an owner I have to figure out how to train workers to put the interest of the company first, the profit levels of the company first. Integration is a huge undertaking, and it must be done with the utmost care. It is much more involved than where the markets are more sophisticated.”