Charting New Horizons

In today’s uncertain economy, companies must reassess their strategies, taking into account issues such as digitalisation and climate change in order to ensure their long-term success. How can adapting M&A approaches to securing assets and filling skill gaps pave the way for sustained success and market leadership?

Rethinking M&A strategies

Companies have to navigate an increasingly difficult and uncertain economic environment. Thriving in such an environment requires companies to reimagine the future of their markets, reexamine their core capabilities and reevaluate their competitive advantages. In parallel, as part of long-term value creation, companies also need to consider the impacts of other macro themes including digitalisation, technology shifts involving issues such as AI, climate change, healthcare and well-being, energy transition, skills shortages and aging populations.

As such, capital allocation needs to be considered and evaluated through the lens of whether the current asset portfolio is fit for purpose to enable optimised returns going forward. This will help companies make fundamental choices on growth strategies, prioritise the markets and segments in which they need to operate, identify gaps and the skills they need to win, determine which assets will be needed for the future and determine how best to transform themselves in the process by making both organic and inorganic investments.

Trends reshaping M&A in the Czech Republic

In 2023, M&A deal activity in the Czech Republic remained relatively resilient despite the general economic slowdown in Europe caused by inflation, rising interest rates, the increased cost of capital and ongoing geopolitical crises. Preliminary data from the merger market indicates the overall deal count in 2023 was 75 (a 6.3% decrease compared to 2022).

With a 71% share in small to medium-sized transactions, closing accounts continues to be the generally preferred mechanism for determining prices in the Czech Republic. In the pre-pandemic period, however, the locked-box mechanism gained some popularity in the SPAs, as the Czech Republic became a “seller’s” market, putting more emphasis on making the purchase price as certain as possible. However, the economic uncertainty caused by the energy crisis and the ongoing challenging economic environment call for more flexible purchase price arrangements such as earn-outs. These may often be the only way to overcome deadlock in negotiations, particularly when the gap between sellers’ price expectations and bidders’ risk appetite is too wide. Earn-outs are thus currently being widely adopted, though it is unclear whether this trend may persist once economic/business stability is restored.

Few shifts occurred in the origin of key bidders

Between 2016 and 2022, local transactions accounted for more than half of all deals, rising to more than two-thirds in 2023. Czech state-owned companies made significant strategic acquisitions in 2023, mainly in the energy sector. French investors emerged as the foremost foreign participants in 2023, sealing five deals, closely trailed by three deals from US investors. Over the long term, German investors have been the most active due to the close commercial ties between the Czech and German economies. While US investors exhibited notable activity in 2022 and became the second most prominent in 2023, acquisitions from non-EU nations (including the UK) remained infrequent, accounting for only about 20% of acquisitions in the Czech Republic over the past six years. Strategic players continue to dominate the M&A market, but 2023 witnessed the largest number of financial transactions since 2015, signaling a shift in dynamics.