M&A in Russia: It’s Now or Never for Foreign Acquirers

Due to the current economic crisis, the government has decided to temporarily switch off the light at the end of the tunnel.” This typical bit of wry Russian humor has proved popular in Moscow lately. The last six months have indeed resembled a never-ending tunnel of bad news, with frozen capital markets, cascades of bankruptcies, hundreds of thousands of jobs lost and GDP forecasts growing ever more negative. “It seems we have finally reached the bottom, and we will start drilling” was how a Russian economist ironically described the prospects of an economy that is yet to develop any serious alternative to drilling to sustain itself.
Amid the general pessimism, however, there are enough reasons to believe that Russia will be one of the first countries to rebound once the tide turns. First, the fact that Russia has a considerably simpler economy than most developed countries means the mess won’t be nearly as complicated to untangle. Second, mortgage and consumer credits are recent phenomena in Russia, and its population hasn’t had the time to build the debt load that currently strangles Western households. Third, Russia’s lifeline has kept flowing so far with the oil barrel maintaining itself comfortably above $40. Finally, the government’s foreign reserves can buy the country valuable time, enabling Russia’s economy to contract but not collapse. Hence, when the international markets resurrect from their state of clinical death, which is bound to happen in the not too distant future, Russia’s exports will pick up and drag its economy out of the slump quicker than most developed countries.
For those who have reasonable faith in Russia’s survival prospects, the current crisis may be a blessing in disguise. Common sense dictates that fortunes are made when the markets are down, not when they are already going strong. So isn’t today a perfect time to buy companies or assets in Russia, with prices having been slashed by as much as 90 percent in some cases? The answer is obviously yes — if you firmly believe that these assets still have a future ahead, and more critically, if you have all of the required cash at your disposal. Cheap debt is no longer there to fuel M&A deals in Russia, but for those who were wise enough to keep some dry powder in the form of available equity, now is a good moment to use it. In other words, there has never been a better time for foreign strategic investors to look for attractive Russian targets.
With an M&A market having shifted 180 degrees from a seller’s to a buyer’s market, cash rich multinationals should aggressively pursue their development plans in Russia. After all, where else than in emerging economies such as Russia can they expect to capture future growth? By doing so, they will find attentive Russian owners who are worried by liquidity issues and unsure that they will manage to sail through the storm. They will find their hitherto formidable competitors, the private equity funds and other financial investors, unable to raise the needed capital to fight them for the purchase of valuable companies. They will find domestic strategic investors, even the largest ones, too busy servicing their own debts to look for new acquisitions. And finally, as the icing on the cake, they will find that even Russian targets with strong balance sheets and no intention to sell at a discount will still cost at least 30 percent less than half a year ago, thanks to the providential (from the foreign buyer’s viewpoint) fall in the ruble’s exchange rate. Determined investors who are not afraid of the dark will be the first to reach the end of the tunnel, and thus lead lit the way for others to follow.