The Moscow M&A market between Q2 2003 and Q4 2006 saw a rise in the number of M&A targets, with the Q4 2006 figure 227% higher than the Q2 2003 one. However, throughout the year 2007 the number of M&A targets was steadily in decline. Then, in Q2008 there came a 40% spike compared with the previous quarter. Between Q2 and Q4 the number of M&A targets was again on the wane. In Q1 2009 the number of acquisitions in Moscow was 29% lower than in Q1 2008, while in Q2 2009 it rose by 50% against Q2 2008.
The number of transactions on the St Petersburg market remained stable throughout the given period, not rising above 15 targets a quarter (Fig. 5).
Fig. 5. Number of M&A targets on the Moscow and St Petersburg markets.
As regards an M&A target breakdown per federal district in the period under review, the leaders in terms of the number of targets are the Central and Northwest, followed by the Volga Federal District. The figure for the Central Federal District, including Moscow, was 646 targets; for the Northwest Federal District, including St Petersburg, 245; and for the Volga Federal District, 217 (Fig. 6). Despite an emerging trend towards a more even spread Section Institutional Problems of enterprises across Russia, Moscow and the Central Federal District still remain the most active regions.
Central FD Volga FD Northwest FD Siberian FD Far Eastern FD Urals FD Southern FD Fig. 6. M&A target share per Russian federal districts between Q2 2003 and Q2 2009.
The most widespread form of integration on the M&A market is sale/purchase of shares, accounting for over 50% of all acquisitions during the period under review.
The most active players on the M&A market are open joint-stock companies (OAO) (Fig.
7). They account for 44% of all transactions. They are followed by limited liability companies (OOO), accounting for 25% of all transactions. During the period under review, in six transactions the buyers were state unitary enterprises (GUP). GUPs bought companies operating in the following sectors: manufacturing, hospitality and catering, transport and communications, utilities, finance.
Fig. 7. Number of transactions between companies of different forms of incorporation between Q2 2003 and Q2 2009.
RUSSIAN ECONOMY IN trends and outlooks Number of 500transactions Buyer's owner Target owner Fig. 8. Classification of M&A transactions per owners of companies involved, between Q2 2003 and Q2 2009.
Fig. 8 shows that most frequently buyers were entities owned by financial companies, accounting for 26% of all transactions (35% of the total amount of transactions) for which ownership information is available. M&A targets also most frequently were assets owned by financial companies, making up 31% of all transactions (33% of the total amount of transactions).
The state acted as the buyer and the seller in 3% of transactions. In terms of amounts involved, the sale of state-owned assets accounted for 2.3% of the total amount of transactions for the given period, whereas acquisitions by the state made up 6% of the total value of transactions.
Foreign companies acted as the buyer in 6% and as the acquisition target in 8% of the overall number of M&A transactions. Acquisitions of foreign companies made up 7% of the total amount of transactions. The biggest transaction involving a foreign target was the acquisition by PKN Orlen of 53.7% of shares in the Lithuanian concern Mazeikiu Nafta (MN) for US$ 1,492 mln from a Yukos subsidiary, Yukos International UK B.V., in May 2006.
International companies acted as the buyer in 9% and as the seller in 6% of M&A transactions. These transactions accounted for 13% of the total amount. The biggest transaction to have an international company as an M&A target was the sale of 50% plus one share in Sakhalin Energy Investment Company Ltd to Gazprom in February 2007 for US$ 7,450 mln. As a result of this transaction, Shell retained 27.5% and Mitsui and Mitsubishi, 12.5% and 10% in the company respectively.
Transactions to purchase companies in joint insider-outsider ownership made up 5% of the total number and 3.6% of the total amount. Companies with this form of ownership acted as buyers in 4.7% of transactions.
State Insider manager Foreign company commercial entity State together with International capital Financial companies Non-financial outsider Group of insider owners Group of outsider owners Insider and outsider owners Section Institutional Problems Companies owned by an insider manager were M&A targets in 6% of transactions, accounting for 5.5% of the total amount of transactions. Companies owned by an insider manager acted as buyers in 15% of transactions.
A group of insider owners acted as the M&A target and the buyer in 18% of transactions each. Purchases of companies co-owned by management and staff accounted for 5% of the total amount of transactions in the period under review.
Companies owned by non-financial outsiders acted in 3% of M&A transactions as buyers and in 1.5% as targets, accounting for 0.8% of the total amount of transactions between Q2003 and Q2 2009.
Acquisitions of companies owned by a group of outsiders made up 19.5% of the total amount of transactions in the given period, while in terms of numbers, companies like these acted as M&A targets in 15% and as buyers, in 10% of transactions.
Transactions in which acquisition targets were companies co-owned by the state and a commercial entity made up 5% of the total amount and 5% of the total number of M&A transactions. As buyers, companies like these appeared in 4% of transactions.
For Russia as a whole, the most frequent M&A targets were manufacturing companies, making up 30% of all targets. The trend was the same for Moscow and St Petersburg, where manufacturing companies were the most frequent M&A targets: 264 out of 1,023 and 27 out of 111 respectively.
Number of transactions Fig. 9. Intra-industry transactions between Q2 2003 and Q2 2009.
Mining Finance Utilities Education Real estate Construction Other services Manufacturing Hospitality and catering Wholesale and retail trade Health care and social services Transport and communications Agriculture, hunting and forestry Public administration and defense RUSSIAN ECONOMY IN trends and outlooks Acquisitions within the same industry range from 8 to 87% between Q2 2008 and Q2009. For instance, agricultural and forestry companies purchased companies within their industries in 28% of cases in the given period. For entities dealing with public administration and military security, the share of transactions within their sectors was 8% of the total number of transactions. For utilities companies the figure was 41%, for construction companies, 16%.
Industries with the largest number of acquisitions within their own sector were finance (88%), transport and communications (64%) and services (61%).
The trend towards mergers and acquisitions between companies engaged in the same type of activity was also evident in wholesale and retail trade (67%) and in manufacturing (54%).
Among Russian buyers the highest demand was for companies in manufacturing (31% of all transactions in the period under review), mining (13%), transport and communications (13%) (Fig. 10).
Number of transactions Fig. 10. Breakdown of M&A targets per industry, between Q2 2003 and Q2 2009.
Among agricultural companies the highest demand was for manufacturing and processing assets (65% of all transactions). In the Russian Classification of Types of Economic Activity, the Manufacturing and Processing group consists of 14 subgroups. Out of 26 transactions in which agricultural companies were the buyers, 14 targeted companies from the food, beverages and tobacco subgroup and 9, agricultural companies. There is a trend whereby companies producing raw materials are seeking to expand their circle of consumers by producing semi-finished and end products.
Mining Finance Education Real estate Agriculture Construction Other services Manufacturing Hunting and forestry Hospitality and catering Wholesale and retail trade Health care and social services Transport and communications Public administration and defense Section Institutional Problems Some 62% of transactions carried out by mining companies involve assets in similar industries. For example, mining, including oil and gas, companies actively buy into manufacturing and processing, mainly metals: 23 out of 27 transactions in manufacturing and processing. In other words, the trend is the same as in agriculture: companies seek to control the whole production cycle in their segment. Given the high cost of this type of business and limited production facilities, this trend leads to monopolistic advantages for companies or businesspeople.
During the period under review, in 73% of cases manufacturing companies conducted transactions within their industry. Out of 395 transactions, 119 were in the food, beverages and tobacco subgroup, 61 in the machine engineering subgroup, 44 in the chemical production subgroup, and 39 in the metals and metal goods subgroup.
Among utilities companies, the highest demand was for assets within the same sector:
47%, or 28 out of 60 transactions. There were 18 transactions in mining, with companies purchasing their own sources of raw materials to reduce their production costs.
Entities dealing with public administration and military security, in five out of 13 transactions bought manufacturing and processing companies, including three machine engineering companies, one chemical and one metals company.
Buyers in wholesale and retail trade in 74% cases purchased companies within their sector, followed by manufacturing and processing companies.
Some 95% of transactions by hospitality and catering companies were to buy assets in the same sector, with the remaining 5% going to communal, social and personal services.
Financial companies bought assets within their sector in 41% of cases. In 21% of cases their targets were manufacturing and processing companies; in 8%, transport companies; in 5%, companies providing communal, social and personal services as well as mining companies; in 4%, construction, utilities and trade companies each; in 2%, hospitality and catering as well as agricultural companies each.
For companies providing communal, social and personal services, intra-industry transactions made up 69% of their transactions. Their second-largest group of targets were transport and communications companies (20%), followed by hospitality and catering and financial companies (6%).
Transactions in which buyers were real estate companies were spread between four sectors, excluding intra-industry acquisitions which made up half of all transactions: 17% of transactions targeted mining assets; 8%, agricultural companies; 8%, manufacturing and processing; and 8%, wholesale and retail trade companies.
For transport and communications buyers, intra-industry acquisitions made up 83% of all transactions, with 4% going to manufacturing and processing targets and 5%, to companies providing communal, social and personal services.
During the period under review, health care entities were buyers in three M&A transactions, with targets coming from the manufacturing and processing sector; utilities and health care.
Fig. 11 shows that foreign companies most frequently bought assets in the following sectors: manufacturing and processing, mining, finance, transport and communications.
RUSSIAN ECONOMY IN trends and outlooks Number of transactions EU countries FSU republics Other foreign countries Fig. 11. Breakdown of targets acquired by foreign companies by sector, between Q2 2003 and Q2 2009.
Manufacturing and processing companies were most often a target for acquisition by buyers from EU countries (43 out of 74 of transactions with foreign companies in this sector). As a rule, irrespective of the acceptor's registration, transactions were conducted between Russian businessmen or their groups.
The largest number of transactions between Q2 2003 and Q2 2009 involved the acquisition of companies registered in the Central Federal District, with most targets coming from the manufacturing and processing, transport and communications and finance sectors.
Number of transactions 1800 90% 1600 80% 1400 70% 1200 60% 1000 50% 800 40% 600 30% 400 20% 200 10% 0 0% 1 - 25% 26 - 49% 50% Control Number of transactions % of the total amount Fig. 12. Share bought in M&A targets, between Q2 2003 and Q2 2009.
(Number of transactions; % of the total amount; Control) Mining Finance Utilities forestry Education Public Real estate catering Hunting and retail trade Construction Other services administration Wholesale and Manufacturing social services Hospitality and Transport and Health care and communications Section Institutional Problems In the Siberian Federal District, the majority of M&A targets belonged to the mining and manufacturing and processing sectors; in the Far Eastern Federal District, transport and communications; and in the Urals Federal District, manufacturing and processing and mining companies.
The most frequently used form of integration on the M&A market is gaining control over a company: these transactions accounted for 86.5% of all transactions during the period under review (Fig. 12) and made up 68.5% of the total amount of transactions. The term control is used to mean transactions to acquire 51% and more shares in a target company if it is a jointstock company or full acquisition of companies with other forms of incorporation.
Acquisitions of half a target company – either 50% of shares or half in the company's authorized capital – make up 6% of the total number of transactions, or 11% of their total amount. Acquisitions of a blocking share, or 26-49%, in a company make up 4% of all transactions in the given period, or 5% of their total amount. Transactions to acquire a 1–25% share in a company accounted for 2% of all transactions between Q2 2003 and Q2 2009, or 2% of their value (Fig. 13).
When the target is a Russian company, the most frequently used form of integration is assuming control over a company: it accounts for 1,301 purchases of Russian companies out of 1,476, or for 58% of the overall transaction amount in the period under review.
Number of transactions 1-25% 26-49% 50% Fig.13. Dynamic of the number of transactions depending on the bought-out share, between Q2 2003 and Q2 2009.
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