Czech Rep. tops ‘M&A maturity index’ for CEE/CIS

The Czech Republic has tied for 24^th place overall in consultancy Ernst & Young’s mergers and acquisitions “maturity index,” which surveyed 175 countries, and was named the best performer in the CEE region.

“It is no surprise that the most mature markets are also those that have traditionally played the biggest part in M&A transactions. The United States and the United Kingdom top the rankings, beaten only by another established economy: Canada,” the “Big Four” consultancy said in the report. ‘What is, however, potentially surprising is the lofty position of other nations, often described as less mature, recently matured, or even emerging.’

“What is, however, potentially surprising is the lofty position of other nations, often described as less mature, recently matured, or even emerging. Israel, Chile, the Czech Republic and Malaysia all appear in the early 20s of the rankings,” Ernst & Young said.

The index uses 36 factors in six groups to measure the risk of undertaking transactions. The averages are weighted by the size of GDP within a regional group. “The greater the maturity, the lower the risk of undertaking transactions. Where risks exist, there is however, the potential for significant opportunity,” the report said.

Israel scored best in technological factors, Chile in the political arena, the Czech Republic in sociocultural sphere and Malaysia in economic factors. “These states lead the BRIC countries [Brazil, Russia, India and China] that are typically mentioned in analysis concerning major emerging markets,” it said.

The index was developed by Ernst & Young in cooperation with the M&A Research Centre (MARC) at Cass Business School in London.

Czechs lead CEE region

The Czech Republic overall had an M&A maturity score of 72 percent, which beat the global average by 1 percentage point. The country scored 92 percent in sociocultural factors, 83 percent in technological factors, 75 percent in political factors, 71 percent in economic factors, 54 percent in financial factors and 54 percent in regulatory factors. By comparison, the CEE/CIS region had a score of 57 percent.

Sociocultural factors — the area where the Czech Republic did best — are those relating to people and work force issues. “Of particular importance are the availability of talent and levels of skills,” the summary said.

Regulatory factors, an area where this country did poorly, refer to the local legal and regulatory environment. “These include the rule of law, i.e., the consistency of application of rules and therefore the predictability of judgments under it,” the report said.

Financial factors were also seen as a drawback for the Czech Republic. These are specifically related to capital and labor markets and include the development of local stock markets, costs of staff and the availability of debt financing.

Economic factors include the overall macro picture — the size and shape of a country’s economy and growth rates. Political factors include overall political stability and factors such as corruption, while technological factors relate to the availability and direction of technology, including the level of investment in research and development (R&D) and innovation.

For the rest of the Visegrád Four countries, Poland scored 68 percent, Hungary scored 65 percent and Slovakia scored 64 percent. The Czech Republic’s western neighbors, Germany and Austria, came in 84 percent and 75 percent respectively, both with a perfect score of 100 percent in political factors.

Russia most complex of BRIC group

The four BRIC countries — Brazil, Russia, India and China — lagged behind the Czech Republic. “Of the BRICs, China perhaps surprisingly tops Brazil, India and Russia in the M&A maturity rankings. Technological maturity has contributed strongly to the success of China, while regulatory and political issues have impinged on its progress,” the report said.

“Brazil also shows strength in technology but is again held back by the same factors. Russia offers a similar profile, with a strong performance in the sociocultural arena, but an even weaker political score,” the report stated, adding that in India, good performances in financial and technological arenas are hit not only by regulatory and political concerns, but by sociocultural issues as well. ‘A world power for much of the last century, [Russia] has recently been through a process of recovery, while its peers are in the ascendancy for the first time.’

The Ernst & Young report cited Russia, with an overall score of 57 percent, as being the most complex of the emerging markets although its performance in regulatory and political arenas is less impressive.

“A world power for much of the last century, [the Russian] market has recently been through a process of recovery, while its peers are in the ascendancy for the first time. Despite a blip in 2009, GDP growth in Russia has averaged 5 percent over the past decade. From an M&A maturity perspective, Russia scores very strongly in sociocultural factors,” the report said.

M&A recovery in Europe

Globally, the situation is improving for M&As, the report said. “The enhanced appetite for transactions has led to an increase in the volume and value of M&A. In Q3 2010, global activity totaled $599 billion, the strongest quarter for two years. While well short of the heights reached in 2007, this level represents a 35 percent increase on the average quarter during what some are calling the ‘great recession’ of 2008–09,” Ernst & Young said.

In a separate report, law firm White & Case pointed out M&A activity in Europe is increasing due to economic recovery. At the end of 2010, activity on the European markets was the highest since 2008. Last year, the number of M&A transactions in Europe increased by more than 40 percent compared to 2009. More than 4,600 officially published transactions with a total value of more than $645 billion were made in Europe, according to White & Case.

“Transaction activity in the Czech Republic is also recovering, despite the fact that the number of M&A transactions in the Czech Republic was the lowest in the last four years,” Michal Dlouhý, a partner in the law firm White & Case and head of the M&A practice for Central and Eastern Europe, said in a press release.

Dlouhý listed the sale of České Radiokomunikace to the Macquarie Group of Australia for €574 million as the largest transaction last year on the Czech Market. Doosan Heavy Industries and software firm Avast were also involved in big M&A deals on the Czech market, according to White & Case.