ALM Properties, Inc.
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PROJECTED M&A TRENDS FOR SCANDINAVIA AND FINLAND IN 2013
THE unstable times for the M&A market in general continues in Scandinavia. The Eurozone crisis with all its consequences and the uncertain political atmosphere has, among other factors, led to the current difficult market situation. Although the circumstances remain unsettled, there are quite strong reserves on corporate balance sheets and liquidity in private equity funds. When confidence in the markets increases and the economic atmosphere improves, there is a good reason to expect also the M&A activity to strengthen.
During the unstable times, Scandinavia and Finland as a part of it have remained fairly attractive targets for investments. One of the reasons is the fact that the Eurozone crisis has not affected the Finnish economy as much as it has, for example, certain areas of Central and Western Europe. From an investor’s point of view, it is important that the legal system in Finland, as well as in other Scandinavian countries, is considered to be reliable and foreseeable also during the unstable periods. Further, being a part of the EU since 1995 (and participation in its legal harmonization process) could be considered as a factor that increases the investors’ confidence in the Finnish legal system. Also, the Finnish banking sector is stable; the stress tests executed by the Financial Supervisory Authority in June 2012 show that Finnish banks have a strong ability to bear risks. The deposits received by the Finnish banks and the long term funding from the markets have both developed positively, which decreases the financing risks.
The attractiveness of Finland and other Scandinavian countries as investment targets is supported by recent statistics and our experience on the market. Sweden, Finland and Norway made their way to the top 20 list of the global deals signed off measured by deal volume on the first half of 2012. Although Sweden, Finland and Norway were at the top 20 in deal volume, the Scandinavian countries were not in the top 20 list of deal value (Zephyr Half Year M&A Report, Global H1 2012). Nevertheless, we have seen an increasing amount of investments coming, among others, from the US and the UK. Recently, many of the foreign investments have been made by industrial corporations that, for strategic reasons have decided to invest in Finland.
If we look exclusively at the Scandinavian deals, during Q3 2012 Finland was the leading Scandinavian country in deal volume with 279 deals signed off. Although the volume of the deals has not decreased drastically in Scandinavia, the value of the deals, for example comparing Q3 2011 and Q3 2012, has decreased substantially. During Q3 2012 Norway was the top Scandinavian country in deal value with 2,906 million euros volume while Finland had 1,048 million euros. Sweden was ranked highest during Q3 and Q4 2011 and Q1 2012, but during the last two quarters it has found itself after its western neighbor due to decreased deal volume. As regards the most attractive business sectors in Scandinavia, wholesale & retail trade and machinery, equipment, furniture and recycling are in the top of the list. Most of the deals in Q3 2012 were general M&A transactions (Zephyr Quarterly M&A report, Nordic Region, Q3 2012). Some IPO’s were made as well, but the volume is very low in Scandinavia in general and in Finland particularly. In Finland the IPO market is currently almost non-existing.
It is hard to predict how the M&A market will develop in 2013. However, it is self-evident that to be able to solve the financial crisis, at least the confidence of the investors must be restored. To achieve that, it is essential that the major regulation projects in the European Union are completed as soon as possible in order to reduce the uncertainty regarding the future regulation.
As regards the regulation initiatives in Finland, one of the most significant projects is currently taking place in taxation. The Finnish Government has released the final government bill proposing limitations to the deductibility of interest expenses in business taxation. At the moment, interest expenses are widely deductible and deductibility can be restricted only by applying the transfer pricing regulation or the general provision for tax avoidance. Applying the new regulation will not require any intention of tax avoidance or deviation from the arm’s length principle. The limitations will be applicable as of tax year 2014 and will have significant impact in Finland on domestic and cross-border financing structures. Therefore current structures should be analyzed in detail and necessary changes should be considered carefully. Also the asset transfer tax is subject to increase as from early 2013.
Further, the Act on the Monitoring of Foreigners’ Corporate Acquisitions in Finland (2012) has been renewed. The new act makes it easier for the officials to monitor foreign ownership in Finland. Worth mentioning is also the renewed Competition Act (2011), which streamlines the Finnish legislation towards European Union legislation. Additionally, the AIFM-directive (Alternative Investment Fund Managers Directive) will influence fund management corporations. The regulation in accordance with the directive is intended to take effect in Finland during 2013.
Although the times are unstable for the European and Scandinavian M&A markets and there are some uncertainties regarding the new regulative initiatives within the EU and in Scandinavia, there is also some hope that the M&A markets will settle. However, we don’t expect that the M&A environment will change drastically during early 2013. Of course, the overall M&A trend in Scandinavia will depend on the development on the European economy in general and in particular the development of economies in each of the Scandinavian countries. However, also the legislative initiatives, such as the proposed amendments in the tax legislation, will have an impact on the lucrativeness of the investments in each of the Scandinavian countries and accordingly the M&A activity in general.