As a result of the emergence of the novel coronavirus, the so-called “Great Lockdown” in 2020 caught everyone off guard, and capital markets, as well as M&A activity, was no exception. In late 2019, there were subtle indications of the beginning of the end for the longest bull market of more than 10 years, as the drop of 24% YoY in Q4, can be seen from the decline in both the number and dollar value of M&A deals in Figure 1. However, some of the large market participants were not buying into this particular story and were projecting further growth.
The effect of the public-health policy measures, such as lockdowns and travel restrictions, as well as the enormous increase in unpredictability, resulted in a substantial decline of the total M&A deals both in dollar value and number of transactions. This was true consistently throughout sectors and geographies. Looking at Figure 1, one can observe the worst two quarters for M&A activity, Q1, and Q2 in 2020, since 2013. Similarly, the fast rebound of activity with the expected value for Q1 in 2021 of $917.6 billion, can be attributed to several important factors. First is the unprecedented reaction by central banks, and the magnitude of the fiscal packages that most of the governments around the world undertook as a measure of dealing with the economic and financial effects of the pandemic. The last fiscal package of $1.84 billion alone, as undertaken by the Biden administration, was worth 8.8% of US GDP in 2020. Second, the massive vaccination campaigns in the United States, the United Kingdom, and Israel have given positive signals to the market in regards to the pace of reducing transmission, and this might be the main driver behind the M&A activity in Q1 and Q2 of 2021. Similarly, one of the leading factors for forecasting future economic growth, the CEO confidence index – as measured by The Conference Board , has been on the rise, and in Q2 of 2021 was at its highest level since the start of the index in 1976, which might indicate further increase in M&A deals being made.
Figure 1: Global M&A Deal Activity, by quarter
Contrary to the US and other countries, Europe has been struggling with vaccination campaigns. However, this has not stopped dealmakers to continue and push M&A activity to all-time highs to an estimated $359.1 billion in Q1 2021. The crisis-induced by Covid-19 accelerated the already present trends of consolidation and cross-border deals especially within the financial-services sector in the European Union. However, as a result of the public health crisis – and in line with other global trends, technology and healthcare stocks were leading the M&A transactions. More importantly, as a consequence of the fact that Europe as a region has historically underperformed compared to the US, global private equity and strategic buyers have been increasing their presence and looking for investment opportunities in the European continent.
As the pandemic developed further and governments rushed to protect public health systems, mostly by shutting down borders and introducing lockdowns, some of the structural shortcomings of certain countries, sectors, global supply chains, and the need for more environmental considerations, came into focus. With the market dislocation on the way, dealmakers rushed to ‘save’ or get on board on particular industries, most of which drove the growth in overall deals. The low prices of commodities, particularly crude oil, as the result of travel restrictions and lockdowns, drove many cost-inefficient producers to be acquired in an industry-wide consolidation. Similarly, the pandemic accelerated the trend for the rising need for quality healthcare services and the innovation in health-tech, both of which led to the rush on this industry in particular. Lastly, the so-called ‘stay at home’ companies and the rising supply chain issues within the semiconductor industry have made the tech companies the ‘go-to’ in terms of M&A activity.
For apparent reasons, such as underdeveloped industry, lack of transparency, unfavorable regulatory predictability, and low integration in financial and capital markets, North Macedonia is not considered an active nor attractive M&A market. However, in more recent years, one could argue that the market for corporate control in Macedonia represents a simplified microcosmos of what is happening with the M&A activity in the European Union, coincidently enough – our biggest trading partner.
Even though the process has been much lengthier compared to other regions, one can observe an industry-wide trend of consolidation within the financial services sector. In North Macedonia, the financial services industry is heavily dominated by large commercial banks, with data from the National Bank of the Republic of North Macedonia (NBRM) showing that the banks hold 81.4% of the total financial assets of the whole country as of 2019. As the most important industry within the broader sector, consolidation can be observed from 2012 to the end of 2020, with the number of banks decreasing by 12.5%. This trend becomes even more obvious with the most recent sale of Ohridska Banka from the financial conglomerate Société Générale to the Austrian, Steiermarkische Bank und Sparkasse, in 2019. Similarly, Komercijalna Banka, as the largest bank in North Macedonia, engaged in a cross-border acquisition of Tirana Bank, with the help of Balfin Group for EUR 57 million. Within the same financial services sector, the sale of the insurance provider Eurolink to the Austrian group Grawe in 2020 can be considered as a movement in the same direction of consolidation.
In December 2020, the acquisition of Seavus by Aricoma was announced. The momentum grew in 2021, as the M&A activity in Macedonia in the first two quarters is poised to reach all-time highs in terms of a number of deals. Following the trends in Europe, in Q1 and Q2 of 2021, there were three publicly announced deals, all of which were in the IT industry. Two of the three acquirers were cross-border companies while one was domestic. As expected, all of the acquiring companies are strategic buyers, with the most revenue and cost-cutting synergies in the middle of the deal thesis. Having in mind the low level of R&D and development of new technology, it is rarely the case that a Macedonian company gets acquired with a technology acquisition investment thesis from the buyer’s side. Similarly, one could argue that it is mostly ‘safe choice companies that are acquired such as in the IT industry – companies with low capital expenditure requirements and relatively stable cash flows. This way, the buyers will easily integrate the companies within their corporate structures and streamline operations, with the ultimate goal of becoming more efficient and increase earnings.
When looking at a higher-level overview of global deal-making, this is not the case. Companies rarely become well-diversified conglomerates, as most of the investors prefer pure plays companies, a fact that results in the existence of the conglomerate discount. By using horizontal integration, some companies even become ‘too big to fail and face major anti-trust probes. This is becoming a more pressing issue as large tech giants are looking for ways to spend their large ‘war-chest on acquisitions (think Amazon and MGM, Facebook’s Instagram and Whatsapp acquisition, etc). At the same time, anti-trust issues can be a major disadvantage for the overall M&A activity, as the lengthiness of these probes often extends to years. At the current pace of innovation and changes in industries, regulation, and the general market environment, lengthy anti-trust probes can make what once would be deemed a good deal, a non-feasible one.
 Pure-play companies are usually companies that operate in one sector and product/activity. In this context, it refers to companies that are interested and engaged in M&A activity only in their respective sector, and not in non-related industries or vertical integration.
 Boston Consulting Group (2014), “Invest wisely, divest strategically”, available at: https://www.bcg.com/publications/2014/divestitures-invest-wisely-divest-strategically-tapping-power-diversity-raise-valuations
To conclude, the world is still in an environment that is advantageous to opportunistic buyers in the wake of the financial and economic destruction brought by the pandemic. Digitalization, consolidation, and cost efficiencies, as well as large investments in ‘clean’ infrastructure and healthcare, are driving the M&A activity in the US and Europe. These trends are replicated in the small and unsubstantial market for deal-making in Macedonia. The size of the deals and relatively low, activity levels in the past can be attributed to different factors such as regulatory environment, lack of quality advisory services, lack of proper financing choices as well as the low development of the capital markets which results in difficult exit opportunities for financial buyers, such as PE funds. However, the recent movements in M&A activity show that Macedonia is not left behind in terms of the European-wide trends, especially in the IT and financial services industry. This has become obvious for foreign buyers that take advantage of the opportunities. The real challenge for the Macedonian business community would be for domestic companies to recognize the opportunities in terms of value creation that M&A can make possible and take initiative to find new targets and ultimately capitalize on these possibilities.
The views expressed in this analysis are the author’s own and do not necessarily reflect Macedonia2025’s editorial stance.
Author: Dimitar Funa