OREANDA-NEWS. On October 16, 2007 PricewaterhouseCoopers and mergermarket have conducted a survey, “Mergers and Acquisitions in the Russian Financial Sector”, among Russian financial institutions, reported the press-centre of PricewaterhouseCoopers.

Mergers and acquisitions activity in the financial services market accelerated in Russia became active during 2006 and the first half of 2007. Over three-quarters (78%) of respondents expect an increase or a significant increase in the overall volume of M&A transactions in Russia over the next 12 months; 74% of respondents are optimistic about M&A in the financial sector.

Last year saw 31 deals in the financial services sector with a net worth of USD 4.8 billion. This year appears to be on track to exceed last year’s performance, with 15 deals worth USD 2,5 billion already announced in the first six months of 2007. Financial institutions that provide banking (61% by number and 71% by value) and insurance (20% for both indicators) services demonstrated the largest number and value of transactions in both 2006 and the first half of 2007.

The majority of respondents (85%) believe that foreign financial institutions’ continued interest in the Russian market will be the key factor for the expected M&A growth in the next few years. Some 40% presume that the main driver is demand for additional capital, while the remaining respondents identified as other important factors increased competition (28%) and expansion into the Russian regions where financial markets are still underdeveloped (27%).

The survey participants (42%) say they expect a higher volume of M&A transactions at the USD 100 million to USD 499 million range, while 26% of those surveyed expect the highest number of transactions to be in excess of USD 500 million. These expectations are triggered by the increasing number of mergers in Russia and midsized banks selling shares in their capital to attract additional capital and in order to get access to know-how. 46% of respondents believe that retail banks will be the most attractive acquisition targets over the next 12 months, which is in line with the sector’s growth trend over the last two years. Investment banks came in second – 24% of respondents consider them most promising in terms of expected M&A activity.

As for demand from foreign investors, 73% of survey participants expect that large Western European countries, in particular Germany, France and Italy, will make a significant number of acquisitions in the Russian financial sector. As a result, and due to the planned expansion of foreign financial organisations already working in Russia, it is expected that the market share of foreign players will increase. 79% of respondents feel positive about foreign players coming to Russia, as they bring the latest technologies with them, a different style of management and higher standards of service.

Gordon Latimir, Financial Services Leader at PricewaterhouseCoopers, commented on the survey’s results:

“We believe that foreign investors will primarily continue to be interested in major institutions from the banking and insurance sectors that specialise in retail. These institutions need to have a developed branch network and experience in working with individuals.

The Russian insurance market, with its low capitalisation and high growth rate, remains very attractive for foreign investors, as evidenced by recent mergers and acquisitions in 2007. But we are still far from a situation where the major global and European companies are represented in Russia, so a new tide of transactions in the Russian insurance market is quite likely in the near future”.

The survey participants also think that, in addition to foreign financial organisations, private equity funds will also play an increasingly important role in the sector’s development. Over two-thirds (73%) expect that the volume of private equity investments in the financial sector will increase, and only 1% anticipate that the number of these transactions will decrease next year.

A combined 72% of respondents believe that Russian investors are at least likely to look at M&A opportunities in Kazakhstan, followed by Central and Eastern Europe (69%), Western Europe (63%), and the Ukraine (53%).

Absence of transparency is considered the most important risk in mergers and acquisitions transactions. This factor was named the most difficult obstacle by a significant 29% of respondents, and a difficult or very difficult obstacle by 52% of respondents. About 12% of respondents say the main obstacle to concluding transactions is an absence of suitable acquisition targets, and an equal number say the reason is competition for attractive investments. The survey also named weaknesses of domestic financial institutions that may adversely affect the M&A volume: underdeveloped risk management processes (49%) and poor management quality (42%).

Michael Knoll, Head of M&A Lead Advisory at PricewaterhouseCoopers, said:

“The anticipated increase in M&A activity warrants that market participants become more sophisticated along all steps of the deal continuum (i.e. during the pre-deal, deal and post-deal stages), which will ultimately lead to the further strengthening of Russia’s financial services industry”.

Methodology
At the request of PricewaterhouseCoopers, mergermarket conducted a study of Russian financial institutions’ standpoint on M&A transactions in the financial sector. Mergermarket arranged interviews with 80 managers of medium and large Russian organisations that render financial services in Russia. Interviews were conducted by telephone and respondents were guaranteed anonymity.

The survey covered respondents from banks (68%), insurance companies (21%), private equity (6%) and pension funds (5%).