KPMG and PwC predict Romania's M&A market to pick up

Big Four firms KPMG and PwC have both released their forecast for Romania’s mergers & acquisitions (M&A) market in 2021, and their findings are largely in sync. Despite the continuing pandemic, healthy transaction numbers are on the cards this year.

The first half of 2020 saw poor deal activity in Romania and worldwide, as economic uncertainty, regulatory deficiencies and a resource crunch put several transactions on hold. That said, deals were on the rise by the end of last year, and many expect this resilience to persist through 2021.

“Even though the pandemic is still ongoing and we are still recovering from the initial panic, we see a lot of optimism in the market and a considerable number of transactions are expected in 2021,” said KPMG Romania partner & head of deal advisory Bogdan Văduva.

More than 60% of respondents to the KPMG survey expect an increase in M&A activity this year, while less than 20% expect a drop. The fact is that Covid-19 has been devastating for the economy, but has brought dynamism in equal measure for those willing and capable to move with the times.

In the broadest sense, M&A will be a solid option for businesses looking to repivot their offerings in line with the new normal – a trend noted by PwC Romania partner and advisory leader Dinu Bumbăcea.

“As a result of the changes the Covid-19 pandemic has brought to the economy, many companies have realised that they need resources, new technologies and a skilled workforce to create long-term value, and that acquisitions are the fastest and most efficient way to deliver them.”

Bumbăcea predicts “fierce competition” for good deals as a result. While the majority engage in this modernisation drive, those with resources on hand will look to exploit the biggest opportunities from the pandemic, as laid out by George Dumitrașcu, Director for deal advisory at KPMG Romania.

“Right now, the opportunities are polarizing on the one hand into distressed companies, which come at a discount, but face major future risks, and, on the other hand, into champions that have risen on the wave of the pandemic, which come at a premium because of their sustainable business models for the post-covid environment.” 

As businesses look to strike while the iron is hot, M&A will become a tool to boost market share as well as expand into new geographies, sectors and product lines. Such opportunistic activity alone will drive a notable spike in deal numbers. The rest will be looking for consolidation, as they grapple with cash constraints and unprecedented challenges.

“There is an increased interest from Romanian companies in consolidating the local market through M&As and even expanding their businesses into other countries in Eastern and Central Europe. Western Europe is the least preferred option due to declining opportunities in more mature markets and geography,” said Richard Perrin, partner & head of advisory at KPMG Romania.

So the growth drivers are in place – aided in the backdrop by a rebuilding economy and more financing options. Private Equity funds with large capital reserves will likely come out of their shell in 2021, while international businesses in healthier economies will likely come knocking for opportunities in Romania.

Key challenges

At the same time, M&A in 2021 will also face unique challenges – specific to the circumstances set by the pandemic. Perhaps the biggest obstacle is the pricing of distressed assets.

Investors looking to buy the dip will demand particularly low prices, while sellers will still want to gain some value from the deal. PwC’s M&A leader in Romania George Ureche noted that this is particularly true in the tech space.

“Following a turbulent year in dealmaking, 2021 is likely to be marked by growing polarisation in asset valuations and the acceleration of digital sector deals. In the case of technology companies, high valuations and fierce competition could lead buyers to take a more aggressive approach in acquiring the desired assets.”

Other challenges include economic uncertainty; lack of suitable targets; a liquidity crunch; post-acquisition complexities in business model transformation, and a host of other issues thrown up by pandemic-related grey areas. Yet, none of this is enough to concretely deter an M&A spike through 2021 according to Perrin.

“Even if there are factors which could inhibit the M&A market, even more so in Covid-19 times, dealmakers are still typically accustomed to facing uncertainty and should see this as an opportunity – early engagement in M&As in times of economic uncertainty should be preferred as opposed to waiting for better days, since this could bring even higher returns.”

The stage is set for a rebound, although Bumbăcea concludes that some patience might still be required. “Despite the increasing number of transactions concluded in the second half of last year, the market has adopted a cautious approach so far in 2021. The roll-out programme for new Covid-19 treatments and vaccines will influence investors' perceptions and purchasing decisions this year.”