In this Kyiv Post interview, Anna Babych, counsel at Kyiv’s Vasil Kisil and Partners law firm, provides insight into mergers and acquisition activity on the domestic market.
Kyiv Post: Do you see the Ukrainian M&A market recovering to pre-crisis levels? If so, when and what sectors will be most attractive?
Anna Babych: Indeed there are some positive movements on the M&A market in 2011 and 2012. However, it is still seen as a gradual progress rather than a drastic change. So, what is present now is the adaptation to and acceptance of existing economic conditions the market players face.
Experts believe that the chances of revival up to pre-crisis levels in the M&A sector in the upcoming couple of years are close to zero. Europe revives very slowly, which inevitably affects Ukraine. Furthermore, although the activity on the M&A market in the elections year is always unpredictable and controversial, currently a temporal slowdown in M&A area appears inevitable.
KP: For the selling side, is now an optimal time for a Ukrainian business owner to sell? Or would it be best to wait a year or two?
AB: Generally, it would be better to wait a year or two. One of key trends of post-crisis market that has not changed so far is the sellers’ tendency to over evaluate their assets proposed for sale. It is the purchaser’s market still and even some good, non-distressed assets offered for sale cannot find the deserving bid.
KP: For the buying side, is now an optimal time to for a foreign investors to buy an asset in Ukraine, or would it be best to wait a year or two?
AB: Yes, it is not bad time to purchase if some general political and country risks are out of considerations. However, the assets offered can be still unattractive because of financial crisis consequences. The purchasers should be ready for this.
KP: Could you identify the top five strategies and hands on changes domestic business owners should start adopting today to ensure they can maximize the sale price of their assets to an investor in the future?
AB: There is no know-how here. To be attractive, the target must be transparent. It means that when the group of Ukrainian companies contemplates the transaction, it must prepare the following: 1) proper ownership structure with holding company in European jurisdiction on top; 2) solid corporate governance procedures; 3) well-built relations with suppliers and customers; 4) sound tax and cash-flow practices, etc.
Unfortunately, a number of local groups still undervalue this preparatory stage and get into negotiations with potential buyer straight away. However, when certain risks are revealed, there is no chance to remove them or remedy without being noticed. Obviously, this affects the final price offered. So, in the end it is always cheaper to carry out vendor due diligence (legal, financial) and clean up the target without sweeping the problems out on the market.
KP: What are the Top 5 risks investors face when buying assets in Ukraine and what strategies and measures can they adopt to main ensure that they get a fair price for assets bought in Ukraine while minimizing risks of potential problems related to the assets?
AB: It is always the hidden risks that force buyers to spend money on advisers. From a legal standpoint, there may be some historical corporate risks (often related to previous owners, not even current sellers) affecting the title to assets (shares), potential court disputes, relations with state authorities and issued licensees and regulatory approvals (more popular for companies active in industries that are subject to specific government regulation).
The rule is also simple – know your seller and know your target. Thorough financial and legal due diligences, competent and professional advisors, purchaser’s awareness on the market and well-prepared process always mitigate the risk of buying a pig in a poke.
