Reflections on 2003

Originally published in IFLR M&A Yearbook 2004

According to the Finnish business weekly Talouselämä, the number of transactions characterised as being Finnish (either a Finnish target or a Finnish party as the seller or the purchaser), amounted to a total of 639 in 2003, a slight increase compared to approximately 625 - 630 transactions in 2002. However, the total value of the deals decreased with approximately 15% from €21 billion in 2002 to € 17.8 billion in 2003. Notably, the year however involved some larger transactions and a number of transactions targeted Finnish listed companies through public tenders.

The Finnish Competition Authority (FCA), that is responsible for clearing merger transactions which reach certain turnover thresholds determined by Finnish law, made a total of 93 merger decisions in 2003, 90 of which were accepted at the first phase of the clearance procedure. With the said 93 transactions in 2003, compared to the 114 transactions processed in 2002, down by approximately 18%, the FCA noticed a slight decrease in M&A activity.

The level of M&A activity can also be studied by reviewing the statistics of the Finnish Venture Capital Association (FVCA). According to the FVCA’s preliminary statistics for 2003, the total amount of invested capital within the private equity business in Finland decreased by approximately 14% from €380 million in 2002 to €328 million in 2003. According to the statistics, the number of investments decreased by approximately 8.5% from 471 to 431. The majority of the invested capital was channelled to new portfolio companies (approximately 69%). The two most attractive sectors were the IT sector (148 investments) and the traditional production sector (137 investments). However, the production sector attracted most of the capital, €210 million, due to some larger investments. Even if investments decreased, there was, on the other hand, an increase in the number of exits made by private equity firms, up by 11.5% from 173 in 2002 to 191 in 2003. This number should, however, be considered with caution since many of the exits were made by repaying debt instruments and do not include any M&A activity. When analysing the statistics of the FVCA, it should be noted that they only include investments made by ordinary members of the FVCA, for which reason venture capital / private equity investments made by non-Finnish venture capital investors in Finland are usually not included. A growing interest of foreign private equity firms in the Finnish market could be detected in 2003.

In general it can be said that the M&A activity in 2003 remained on a quite stable level compared with the activity in 2002.

During 2003 there were no notable legislative changes affecting the assessment of M&A transactions. The last notable change worth mentioning was the combination of the Finnish Competition Counsel (FCC) and the Finnish Market Court. The new Market Court has since March 2002 processed appeals of the FCA decisions relating to the M&A market.

There are, however, some changes ahead regarding competition law, tax law, corporate law and accounting. In competition law, national merger control thresholds will be adjusted slightly and the major impact will be that foreign to foreign transactions without sufficient turnover nexus to the Finnish market will largely fall outside the authority of the FCA. The changes to the Act on Competition Restrictions will enter into force as of 1 May 2004.

In relation to Finnish taxation there is a number of planned changes that potentially will enter into force in the beginning of 2005. At this stage it is, however, impossible to predict the final outcome of the parliamentary discussions and decisions. Nevertheless, it is quite likely that e.g. the corporate tax rate will be lowered to 26% and the tax rate for capital income to 28%, double tax on dividends will be partly introduced and some smaller adjustments will be made to capital gains tax and to tax regulation relating to change of generation.

A complete reform of the Act on Limited Liabilities is also being processed. The ministry’s circulation of comments ended on 19 September 2003 and resulted in approximately 50 statements. The governmental bill will probably be issued by the end of year 2004 and the new act could potentially enter into force as of 1 January 2006.

The implementation of IAS-standards in 2005 will also have an effect on the M&A market. Especially the IAS-standard 22 will alter the valuation principles towards using the market values also in accounting. The same standard will also force companies to allocate the purchase price as much as possible to identifiable assets. Implementing IAS-standards will also put pressure on changing the corporate and tax law in the future.

Several transactions in 2003 involved the acquisition of a Finnish listed company and were consummated by means of a public tender offer. An additional characteristic of the Finnish M&A markets during 2003 was the relatively large number of divestments of non-core businesses.

One of the transactions worth mentioning was the acquisition of Partek Oyj by Kone Oyj, one of the leading companies in the global elevator and escalator business. This transaction valued at €1.3 billion actually took place already in 2002, but since Kone Oyj has continued the divestments of non-core businesses included in the Partek group, it has had a substantial impact on the M&A activity also in 2003. Partek group’s subsidiary Partek Forest Oy, active in the forest machine business, was sold to Komatsu Ltd of Japan for an enterprise value of €120 million. Another subsidiary of Partek Oyj, Valtra Oy, active in the tractor business, was sold to Argo Corporation for €600 million. Both of these transactions emphasise the difficulties of Finnish companies in competing with larger multinational enterprises with extensive resources in bidding processes. Especially when it comes to Valtra Oy there was a lot of debate and interest, also on the political scene, to keep the company’s ownership in Finland.

A transaction that included an element of a "takeover battle" was the acquisition of the listed cookware producer, Hackman Oyj, by the Italian Ali S.P.A. for approximately €180 million. The Swedish private equity firm Nordic Capital had first made an offer to the company but later lost the bidding process to the Italians. Also this transaction involves divestments. After acquiring Hackman Oyj, Ali S.P.A decided to divest its forest ownership of the group for €27 million and has declared that it is looking for a buyer for the Iittala division (glass and porcelain production). A squeeze-out is currently taking place.

Another launch of a public offer was the battle for the IT company Novo Group Oyj. First the much smaller IT company Sysopen Oyj launched a bid for Novo Group Oyj, but after a take-over battle the Swedish IT company WM-Data AB won the bidding process. The deal was valued at approximately €200 million.

The Finnish M&A market witnessed another launch of a public tender offer already in December 2002 as General Electric Company (GE) and the Finnish company Instrumentarium Oyj, which is a leading international medical technology company, announced a combination agreement, pursuant to which GE Medical Systems division acquires Instrumentarium Oyj. The deal, valued at approximately €1.8 billion, was closed in 2003 after a squeeze-out and the shares are no longer listed at the Helsinki Stock Exchange.

Another large public tender offer in 2003 was the German Phoenix International Betailigungs GmbH purchase of the remaining outstanding shares in the pharmaceutical wholesaler Tamro Oyj. The deal was valued at €180 million and there is a squeeze-out currently taking place.

Other public to private, but smaller transactions during 2003 were the acquisition of Eimo Oyj (a producer of plastic components) by Foxconn Finland Invest Oy for approximately €65 million, the acquisition of Janton Oyj (a media company) by a fund managed by the Bank of America for approximately €130 million, the acquisition of approximately 54.5% of the votes in Norvestia Oyj (an investment company) by Kaupthing Bunadarbanki hf. for approximately €62.6 million and the acquisition of approximately 85% of the shares in Polar Kiinteistöt Oyj (a real estate company) by the German company IVG Immobilien AG.

One of the largest M&A transactions during 2003 was the corporate transaction between Outokumpu Oyj and the Swedish Boliden AB. Boliden AB acquired Outokumpu Oyj's mining and smelting operations within zinc and copper and sold its fabrication and technology sales operations to Outokumpu Oyj. The consideration to be paid by Boliden AB to Outokumpu Oyj for the acquired mining and smelting assets consists of issuance of new shares in kind to Outokumpu Oyj corresponding to 49% of all shares in Boliden AB, cash payment of €373 million and issue of a subordinated debenture.

The listed company YIT-Yhtymä Oyj acquired in 2003 the building businesses of ABB in the Nordic countries, the Baltic countries and Russia. YIT-Yhtymät Oyj paid approximately €170 million in cash for the operations.

There has been a lot of public to private activity during 2003. This trend is likely to continue in 2004. Valuations that have been a large obstacle for consolidation and M&A activity in general, have returned to slightly higher levels (up by approximately 22% the two first months in 2004) and this might increase the M&A activity. The challenge is to get the expectations to meet regarding the valuations of both sellers and buyers. Companies that could be targeted are for instance real-estate companies and many of the smaller IT companies.

The Finnish marketplace is also likely see further consolidation in the banking and insurance sector. There are, for instance, a lot of rumours regarding the financial institution Sampo Oyj and its future strategy. It is also expected that Aktia Savings Bank will try to look for new partners after the collapse of the cooperation with the Bank of Åland. Another sector that will probably experience consolidation is the fragmented energy sector, as Finland hosts over 100 energy companies of different sizes. Examples of active players are Fortum Oyj, that made eight acquisitions in 2003 and the Swedish Vattenfall AB that has declared an interest in acquiring more energy companies in Finland. The German player E.ON also holds a significant position and could be interested in expanding its operations. A third sector where consolidation is to be expected is among the smaller technology and telecom companies, many of which are experiencing financial distress and are bound to be looking for partners in Finland or abroad. A good example is Benefon Oyj, listed on the NM-list, a provider of mobile telematics solutions. A fourth sector that is likely to be targeted is the real-estate business. There has already been some activity in 2003, for instance the acquisition of Polar Kiinteistöt mentioned above and Nordea Bank Oyj’s divestment of some of its real estate. The real-estate business in Sweden has attracted a lot of international interest, which usually is a sign that the same development will take place in Finland, although with some delay.

Due to decreasing profits and market pressure a general trend is that most companies are focusing on cost cutting and streamlining as well as increasingly placing emphasis on their core businesses. This often results in divestments of non-core businesses (Kone Oyj being a good example with several divestments after the acquisition of Partek Oyj), which alongside consolidation and public to private transactions probably will be the main driver of M&A business in 2004. Another expected trend is the increased activity in the private equity field and increased interest by foreign private equity firms in the Finnish market. Another trend is that private equity firms have more and more started to invest together in target companies. A good example is CapMan Oyj’s acquisition of the business division Noiro of Orion Oyj for approximately €100 million in 2003 and the fast divestment of 34% of the shares in the New-co to the pan-European private equity investor Langholm Capital LLP.