Market resilience despite adversity

Strong deal fundamentals in emerging Europe 

M&A in Central and Eastern Europe remained surprisingly buoyant during 2022, despite combined pressures from the war in Ukraine, the aftermath of the Covid-19 pandemic, and an increasingly challenging economic environment. After a strong end to deal-making in 2021, the new year looked set to continue the trend. M&A professionals were more cautious, but deal-making activity held steady as the year evolved. Strong fundamentals will likely continue to underpin activity in the medium term.

An uncertain landscape

A strong end to 2021 meant dealmakers in emerging Europe started 2022 in a cautiously optimistic mood. The prospect of life returning to some kind of normality after the pandemic was balanced against the threat of rising inflation and the withdrawal of central bank support, but the fundamentals for continued M&A activity were in place. 

That changed in February when Russia’s invasion of Ukraine sent shockwaves across Europe and the world. Alongside the human suffering and destruction in Ukraine, there was a dramatic impact on energy prices continent-wide, stoking up inflationary pressures that were already building and prompting central bankers to take a more hawkish stance. 

In the face of a near-perfect storm of adverse economic conditions, it was no surprise that M&A activity in 2022 was more challenging. What came as a revelation to some observers was just how resilient M&A markets proved to be.

Foundations remain solid

Against the backdrop of rising inflation and market volatility, the underlying drivers of change for sellers and buyers, such as digitalisation, energy efficiency and consumer trends, continued to underpin M&A activity.

The CMS European M&A Outlook (September 2022) showed contrasting views on emerging Europe, a reflection of its place as home to some of fastest growing economies in Europe and also some of the least mature M&A markets. 

24% of those polled regarded it as the strongest market for deal growth, 19% as the weakest.

Technology

The technology sector continues to deliver across all areas from software development to telecoms. Activity in this sector is likely to continue over the next 24 months. The digital transformation of the region is increasing the appetite for software assets, seeing one of the largest valuation multiples over recent months. Sectors expected to be standout performers in the coming years include cybersecurity, ERP, healthcare and AI & analytics. 

Energy

The energy market experienced severe volatility in 2022. Energy security became a top priority, likely to further accelerate the shift towards renewables. Although, deal activity in the sector in the region was down year-on-year, expectations are the energy transition and increased interest by global infra funds to invest in the region will continue to drive activity in the sector in the mid to long term.

Manufacturing and services

The volume of M&A activity in the manufacturing and services sectors, confirms the region’s attractiveness for nearshoring and outsourcing. 

Private equity

The trends that have been driving private equity investment have not gone away. Private equity deal volumes edged up to a new five-year high, though deal values were at the lowest level in five years. 

Emerging Europe has proved fertile ground for home-grown and international private equity firms. Alongside them venture capital has nurtured start-ups and taken them to the next level. Although the region has seen strong growth in PE and VC, it still lags western Europe, leaving room for growth through consolidation in fragmented markets.

Emerging Europe has proved fertile ground for home-grown and international private equity firms.

Outlook

The resilience of M&A in 2022 confirms the attractiveness of emerging Europe even in difficult times. Despite the uncertainty and volatility, some countries saw higher deal activity.

The challenging macroeconomic political and security backdrop may stifle M&A in the coming months, but the region’s strong fundamentals will continue to underpin activity in the medium term. Much will depend on inflation, energy prices, the availability of raw materials, and the conflict in Ukraine, where attention at home and abroad is already shifting to rebuilding and reconstruction.