Law in Latvia: M&A deals return in 2011
By Anatol Steven.
01.12.2011
Mergers and acquisitions vanished almost entirely during the crisis of 2008-09. Now they’re back on the table, and lawyers are benefiting.
Not so long ago, companies in Latvia – and also the country itself – were spending a great of their time thinking about survival. In 2011, they have been looking ahead to prosperity again, albeit with one nervous eye on the eurozone crisis. Before, the trend was that law firms were redirecting their teams from mergers and acquisitions to deal with the messier business of arbitration and litigation. In 2011, however, M&A deals are back.
Some legal services firms are reporting a doubling of turnover in the first half of this year compared to 2010 (see further articles). Businesses have more cash these days to spend on lawyers, initiating deals, creating protection, or resolving conflicts that were temporarily and painfully shelved during the economic crisis.
Just as broken marriages limped on through the downturn because of a lack of money to finance a split, now more cash is available for divorce of all kinds.
Tark Grunte Sutkiene is a full-service commercial law firm providing advice on complex commercial transactions covering public and private law in each of the three Baltic countries. Collectively it has more than 80 attorneys and lawyers and a total staff of over a hundred.
We last interviewed Managing Partner Ivars Grunte just as the economy was beginning to turn upwards and business confidence surveys were showing that optimism was seeping slowly back. At the time, investors were cautiously probing, scouting around for the first post-crisis deals. In the ten months since then, there has been a surge of M&A activity.
“In the spring and summer everything changed,” he said. “There have been deals in all kinds of sectors. We’ve been busy. The M&A investors are coming.”
As the weather grew warmer, he explained, discussions ensued on a large number of possible deals. Then, in early summer, there was a flood of letters of intent. One or two stopped at the due diligence hurdle and one Swedish investor put his project on hold due to political decisions adopted in the United States having a potential worldwide economic impact. But most clients have followed through and are going ahead with their deals.
“I’m positive that even the Swedish investor will come back at some stage,” Mr Grunte said. “Latvia is looking good amid the rest of Europe, fulfilling its obligations to the IMF and European Central Bank and feeling positive energy from Estonia adopting the euro at the start of 2011. Latvia is sending good messages to investors.”
Case studies
A number of sectors of the economy are benefiting from investor interest. Initially one of the biggest projects absorbing lawyers’ time at Tark Grunte Sutkiene concerned banking. Then two significant energy projects came their way. One of these has been put on hold because the Swedish client was not satisfied with the due diligence findings. But the other is an ongoing project constructing a plant using wooden pellets, from which the eventual energy production is expected to be huge. This also originated from the Nordic countries, via a company established in Estonia.
Another of Mr Grunte’s clients similarly reflects the transformation in mood regarding the Latvian economy. The car dealership sector was one of the hardest hit during the recession, but Norwegian investors are now expanding an establishing an important new dealership and after-sales service of well-known brands.
Mr Grunte’s colleague Senior Associate Andra Rubene and her team have also been assisting with the restructuring of the businesses of a number of major players in the Baltic pharmaceuticals sector, with a view to making them more efficient, both across borders and locally.
Coming back to the banking and finance sector, one more project the law firm is helping to create involves attracting investors to one of the leading providers of electronic payment solutions at Latvian points of sale. Tark Grunte Sutkiene has prepared the vendors’ due diligence report and a “data room”. The report will be distributed to potential investors, and after acquainting themselves with it and the materials in the data room, interested investors will be able to address the law firm with any questions they might have. At the end of this process the investors will decide whether or not to buy the company.
Legal balance
However, the negative effects of the disastrous economic crisis, in which Latvia lost a quarter of its GDP, are still being felt. The litigation department continues to be busy. Recently, Tark Grunte Sutkiene has been involved in a number of high-profile board liability cases concerning company claims against former managers for the compensation of damages.
“Litigation will remain a focal point for legal services in Latvia,” Mr Grunte cautioned. “Many court cases have been initiated recently. The resurging economy is giving businesspeople the confidence to resolve longstanding conflicts.”
But there is some middle ground for law firms busy with both acquisitions and arbitration. The law firm is currently involved in an interesting study related to the possible implementation of energy efficiency measures through financing by the European Investment Bank. The aim of the study is to facilitate energy efficiency in Latvia’s leaky Soviet-era residential blocks.
“The results of a similar study have already materialized in Lithuania, and the issue is whether Latvia could follow the experience of Lithuania,” Ms Rubene explained
Mountaineering
For obvious reasons, M&A valuations plunged during the recession, and they have been slower to recover than the actual number of deals. But that has its own benefits for all concerned.
“It’s not clear whether the deal values will ever again reach the heights of 2007,” Mr Grunte said. “But in those days a good proportion of the deals were overpaid. The economic boom was affecting people’s judgment.”
This was clear in all sectors of the economy, as Ms Rubene points out.
“We can see this too with leases for commercial space for example,” she said. “Stores’ profits are significantly lower since Latvians’ purchasing power has not properly recovered, but rental prices are also lower. There is good interest and activity from investors here also, but at more reasonable prices.”
In other words, confidence is returning to the market, but with a clear-headedness that was lacking before.
“Overall the environment is more honest,” Mr Grunte assessed. “Investors are considering more carefully how to finance their deals instead of just buying for the sake of it.”
Those who bought recklessly before the economic crisis and who have managed to hold onto their purchases are paying the price in taxes.
“The government has introduced an array of new taxes,” Ms Rubene said. “Fancy cars are taxed higher, so that if a company found it necessary in 2007 to present a good image by buying five Lexus cars for the top managers, now they’re paying a heavy price in tax.”
