M&A Market Trends in 2009

Many companies experiencing serious shortfalls in equity and borrowed funds need to find new sources of finance. Some will have to sell their assets owing to the financial crisis. For example, some of the largest developers are now being forced to sell their assets at a significant discount and abandon development plans for 2009.
The year 2009 will be characterized by property redistribution. A number of market players will discover new opportunities to acquire assets of interest to them at prices that are substantially lower than they have been in recent years. The M&A market will be a buyer’s market. Even though more and more assets become available with every passing day, investors are for the time being reluctant to part with their money and are playing a waiting game for the most part. It is already obvious today that supply exceeds demand. At the same time, many analysts are confident that asset prices still have some way to fall, and that growth on the M&A market should not be expected earlier than mid-2009.
Based on our observations, it is possible to highlight todays specific trends, as well as the issues that companies are bound to face when closing M&A transactions in 2009.
First and foremost, it should be noted that buyers in 2009 will have to rely primarily on their own financial assets, as access to capital markets is restricted at present. Moreover, buyers will clearly have few sources of internal financing. In this context, 2009 will see a rise in the number of transactions involving the acquisition of debtor companies in exchange for their debts, as well as mergers, where the owners of companies on the verge of bankruptcy receive shares in their stronger competitors, losing control of their own businesses in the process. The media have announced potential mergers of leading automotive producers, airlines, etc., where this is, in fact, the only solution for these companies in the current complex financial climate. The ongoing crisis may trigger a substantial amount of M&A transactions, involving the acquisition and disposal of blocking shareholdings (over 25 percent), thereby enabling potential bankrupt companies to secure additional finance, while retaining control.
The terms and conditions of M&A transactions may change in 2009, primarily the transaction price and structure, periods for closing deals, the payment terms and guarantees on the performance of obligations by all of the parties involved.
One material issue, which will inevitably become a stumbling block between the seller and the buyer in 2009, concerns the determination of an assets purchase price. The purchase price tends to be determined on the basis of information about the financial standing of the company to be acquired in the most recent financial period. When buyers determine the purchase price in 2009, it is highly unlikely that they will base their calculations on the targets financial performance in 2008, for example, as it appears impossible to assess the rate of return on the assets to be acquired on the basis of statistical data for previous periods. In this context, it is highly likely that the purchase price of an asset will be based on the subjective estimates of the seller and buyer and that sellers will be ready to make significant concessions when the price of the transaction is determined.
At the same time, such frequently used tools as retained payment, payment in installments, etc. will become rare, as sellers will probably be willing to receive less for their assets provided that they receive the money immediately. Today sellers are already seeking to make buyers close a transaction more rapidly. Sellers are providing all the documents required by buyers as rapidly as possible and helping them to cut any red tape, as they are interested in closing the transaction as rapidly as possible. Only a few sellers will do their homework to close a transaction, including the requisite restructuring of assets, pre-sale due diligence and mitigation of legal, financial and tax risks. As a result, they will be in a better position than other market players. As the seller needs to proceed with the sale owing to the economic crisis, rather than objective business development goals, very few sellers will prepare appropriately for the transaction.
It goes without saying that amendments to legislation, in particular to the Law “On Limited Liability Companies” will have a material impact on the M&A market in 2009. Technically it will become more onerous and expensive to register the sale of a limited liability company, as another link will be added to the Buyer-Seller-Federal Tax Service chain – a notary that will not only certify the sale transaction, but also file an application with the Federal Tax Service on amendments to the state register.
Increasing control of the Federal Antimonopoly Service, coupled with the imposition of sanctions for non-compliance with antimonopoly legislation, will also affect development of the M&A market in 2009. This is due to the fact that every major transaction directly or indirectly related to the Russian market requires the consent or at the very least the notification of the Federal Antimonopoly Service. Moreover, amendments are being drafted to the Law On the Procedure for Making Foreign Investments in Businesses that are of Strategic Importance for National Defense of the Country and the Security of the State, that will introduce more stringent controls over the performance of transactions. According to these amendments, the Federal Antimonopoly Service will be accorded the right to request additional documents from an investor, including for the purpose of identifying the end beneficiaries of the company. This could complicate materially the approval process for a transaction and mean that it will take longer to obtain such consent.
It is obvious that the proportion of sellers offering assets subject to different types of encumbrances (pledges, etc.), contingent financial liabilities (debts before credit institutions, contracting parties, employers, etc.), current litigation directly related to the asset for sale, etc., will account for a larger share of the M&A market. All these factors will introduce additional risks for the buyer at the time of the acquisition of the asset and will also create additional difficulties related to the pre-sale due diligence of the asset and operating activities in future.
English law is expected to remain applicable for M&A transactions, as many legal tools and understandings of the parties may not to this date, unfortunately, be applied within the framework of Russian rules of law. If there is a dispute between the parties, preference will be granted to such well-recognized legal institutions as the London Court of International Arbitration, Arbitration Institute of the Stockholm Chamber of Commerce, etc.
At the same time, however, the role of the Russian law and the Russian legal environment will remain inviolable in transactions involving a Russian component of some form. Amendments to the Law On Limited Liability Companies, in particular changes that enable participants to conclude agreements stipulating that they are entitled to exercise their rights within the framework of the company, will inevitably establish favorable grounds for more frequent use of the Russian law as applicable law in M&A transactions. We also forecast an increase in 2009 in the number of transactions in which Russia will be determined as the party in potential litigation, including the direct participation of state arbitration courts and the International Court of Commercial Arbitration (ICCA) under the Chamber of Commerce.