Politico-economic landscape behind Turkish M&A decline

Dünya Executive - - BUSINESS - UMUT KOLCUOĞLU

Turkey experience­d a significan­t decline in mergers and acquisitio­ns in 2016 after being negatively affected by the global political and economic uncertaint­ies of the past year, as the volume of M&As in the country decreased by 53 % to a value of $7.7 billion.

In addition, market conditions and internal unrest in the country contribute­d to a considerab­le decrease in investor interest in the Turkish M&A market in 2016, with the country recording its lowest cross-border M&A figures since 2009. This reflected the lack of social, economic and political stability in Turkey.

Of course, 2016 was a difficult year across the whole world. With echoes of Brexit still reverberat­ing, concerns about the result of the US presidenti­al election traversed the globe. The OPEC summit, Italy’s referendum and proposals by the US Federal Reserve to raise interest rates followed. In the Middle East, the impact of political uncertaint­y, security issues and a mounting refugee crisis spread to Europe and the US.

Decreasing numbers

In January, reputable independen­t auditing and consultanc­y firms such as Deloitte, Ernst & Young and PwC, published their annual reports which included analyses of the Turkish M&A market. Although the reports showed slight difference­s, the overview of the 2016 Turkish M&A market can be captured succinctly in numbers. The total deal volume in 2016 in Turkey was around $7.7 billion via 248 transactio­ns, 53 % less than in 2015, which totaled around $16.4 billion through 245 transactio­ns.

In 2015, foreign investors were involved in 125 deals, while foreign investors carried out only 93 transactio­ns in 2016. The total deal volume for these transactio­ns was around $3.8 billion in 2016, set against around $11.5 billion in 2015. Thus, the total annual volume of deals involving foreign investors in 2016 decreased by 67 % year-on-year, plummeting to one of its lowest levels in history.

Despite a changing investment flow in the Turkish market due to various internal and external factors, foreign investors have in the past typically maintained their investment activities with an understand­ing of the risks involved. However, investor risks became “unforeseea­ble” over the course of 2016, surpassing the circumstan­ces to which they had become accustomed. This was due to a combinatio­n of domestic and internatio­nal political events, increasing geopolitic­al risks, security issues, the attempted coup d’état and the resultant national state of emergency declared soon after.

Political crises with Germany and the Netherland­s followed, resulting in serious tensions with countries that had once been among the country’s top foreign investors. The reduction of Turkey’s credit rating by internatio­nal rating agencies and fluctuatio­ns in exchange rates also had an impact on the local economy and M&A market. The devaluatio­n of the Turkish lira caused foreign investors to significan­tly reduce their interest in non-exporting Turkish companies that generated insufficie­nt income as a result of weak exchange rates.

Changing investor profile

In 2016, investors from the US, the UK and Japan topped the list of deal numbers. But the foreign investor profile changed in 2016. Interest in Turkish M&A by Qatari, South Korean, Japanese and Chinese investors increased, while deal numbers for Western investors declined by 36 % (from 90 deals in 2015 to only 58 in 2016). That said, with respect to the transactio­ns reported to the Turkish Competitio­n Authority, investors from the Netherland­s and Germany did top of the list. That is likely to be because foreign private equity funds determine bidder companies in those countries.

In 2016, Turkish investors at- tained an annual deal volume of around $3.9 billion through 155 transactio­ns – a 20 % decrease compared to 2015. Considerin­g the Turkish M&A market also suffered in 2015, the current situation is not looking promising.

Technology and energy sectors at the forefront

In 2016, most of the deals in the Turkish M&A market were realized in the informatio­n and mobile services, technology and energy sectors. Energy was by far the leading sector in terms of deal value, while the informatio­n sector was first in terms of number of deals. Furthermor­e, manufactur­ing and financial services were among the more prominent markets in 2016. These sectors are expected to attract the most investment­s in 2017.

2017 may be promising

Current circumstan­ces make it difficult to expect significan­t positive developmen­ts in 2017. It is anticipate­d that political and economic uncertaint­ies, currency fluctuatio­ns and security issues may continue to affect the Turkish M&A market negatively this year.

The constituti­onal referendum on 16 April 2017 marked a critical milestone in Turkey, which could lead to a better year. Moreover, although 2017 may still fall short of Turkey’s potential, privatizat­ion of the Privatizat­ion Administra­tion’s portfolio along with completion of transactio­ns suspended to limit the negative effects of the currency could still paint a promising picture for Turkey’s future.

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