Despite the ongoing war, there was a significant increase in Mergers & Acquisitions (M&A) transactions and private equity (PE) investments in 2023 compared to 2022, predominantly in the IT sector. Openly accessible market evaluations indicate that the volume of M&A deals might have reached $1.7 billion in 2023, five times more than in 2022. While that does not quite match the level of activity observed in 2021, it sets a cautiously optimistic tone for 2024.
Typically, the primary movers of M&A and PE deals are either Ukrainian companies or foreign companies/funds that are familiar with the Ukrainian market and are willing to accept a reasonable level of risk to invest in businesses they believe to have significant potential. They continually pinpoint opportunities in Ukrainian companies that hold secure revenue streams and robust growth potential.
Current M&A trends in Ukraine
Resilient Industries. The main target businesses are often in the IT/Technology sector, an industry that has shown impressive resilience amidst the war due to their export-oriented, agile, and asset-light business models. For instance, Horizon Capital made several private equity investments in 2023, including an investment in the EdTech company Preply, which raised $70 million in capital with other participants like Reach Capital and Hoxton Ventures, GoIT, a leading provider of online IT education, and Miratech, a prominent global IT services and consulting company, in partnership with the International Finance Corporation (IFC). EY Law Ukraine was privileged to provide full legal support to Miratech in attracting investment and to Horizon Capital in its investment into GoIT.
Venture Capital (VC) activity stayed resilient as well, with an intensified focus on the IT sector. Ukrainian tech startups succeeded in securing investments from globally renowned venture capital firms like Y Combinator, which backed AiSDR and Awesomic, and Toyota Ventures, which funded Haiqu. Significant funding rounds also took place for companies like Fintech Farm (which raised $22 million led by Nordstar) and DressX (which raised $15 million led by Greenfield), in addition to the KKCG's takeover of the IT company Avenga.
The military tech sector also experienced growth. Both state-supported (e.g., Brave1 with a budget of over $39 million) and a few private VC funds (e.g., D3 a budget of over $30 million) are actively investing in this sector in light of the war-stimulated growth in military tech, especially in areas such as drones, robots, cybersecurity, and AI.
Landmark Deal. NJJ Holding, the investment firm owned by Xavier Niel, has acquired two Ukrainian TMT companies: Datagroup-Volia, the leading fixed telecom and pay TV provider in Ukraine, and Lifecell, the country's third-largest mobile operator, in deals worth approximately $0.6 billion, and further plans to merge Datagroup-Volia with Lifecell. Horizon Capital and Mykhaylo Shelemba, the CEO of Datagroup-Volia, intend to retain a minority stake in the merged entity, thus maintaining a local partnership with NJJ in Ukraine. This historic transaction, the first significant investment by a newcomer since the invasion, highlights Ukraine's ability to attract high-quality investments despite the prevailing circumstances.
Ukrainian Buyers. Due to wartime currency control restrictions, which generally prevented Ukrainian companies from repatriating dividends and other funds abroad from 2022 to 2024, these companies accumulated significant capital during this period. Some used these funds to buy out small- to medium-sized businesses or their assets, where the sellers were willing to accept payment in Ukrainian Hryvnia. A notable example occurred in 2023 when the TMT giant Vodafone acquired Freenet, a provider of fixed internet access. In an effort to stimulate economic growth and encourage Ukrainian companies to broaden their international presence, the National Bank of Ukraine has softened some of these restrictions in May 2024, notably by permitting the repatriation of "new" dividends from the period commencing on 1 January 2024, subject to a monthly ceiling of EUR 1 million. Given that this easing does not apply to the payment of dividends from retained earnings accumulated in previous periods, it is probable that the trend of domestic investment will continue even after the implementation of these regulatory relaxations.
In response to the disruption of supply chains and the relocation of personnel, many agribusinesses and other companies are buying out or investing in infrastructure – such as elevators, terminals, warehouses, etc. – in safer parts of Ukraine to reestablish their supply chains. For instance, Kernel, a Ukrainian agri holding, acquired a terminal for transshipping sunflower oil in the port of Reni and storage facilities in the port of Chornomorsk.
Outbound M&As. Another interesting development is that many Ukrainian companies are looking beyond their borders to expand or diversify their businesses, either by buying out existing businesses or investing in facilities like plants and factories abroad.
For instance, in 2022, Intellias, a global technology company with Ukrainian roots, acquired Digitally Inspired, a rapidly growing software engineering company based in the UK. This trend continued in 2024 as Intellias acquired C2 Solutions, a US-based technology services and product lifecycle management firm. Notably, EY Law Ukraine served as legal counsel to Digitally Inspired in the former deal and to Intellias in the latter.
In another instance, in 2023 and 2024, DTEK Group acquired a photovoltaic power plant from Romania's Finas Invest and secured a share purchase agreement with Poland’s Columbus Energy, enabling the construction of a 133 MW battery storage facility in southern Poland.
In addition, Ukrainian industry leaders, such as Avrora and Nova Post, are notably expanding their market presence across Europe. The leading Ukrainian pet food producer Kormotech is set to invest €60 million into the expansion of its cat and dog food production facilities in Lithuania. In 2023, Farmak, a Ukrainian pharmaceutical company, expended its EU presence by acquiring pharmaceutical marketing companies in the Czech Republic and Slovakia, and further extended its reach by purchasing Symphar, a Polish pharmaceutical company, in 2024.
These examples highlight the increasing trend of Ukrainian companies extending their businesses into countries neighboring Ukraine, indicating a strong preference for M&A as their favored method of expansion.
Privatization. Despite the ongoing war, privatization in 2023 has boosted Ukraine's economy with an additional UAH 3.83 billion. Revenue was generated from selling state assets, including the Ust-Dunaisk seaport bought by Elixir Ukraine LLC for $5.5 million, and Belgorod-Dnister sea trade port, which was purchased by Ukrdoninvest LLC for $6 million.
Real Estate. Positive trends were observed in Ukraine's real estate sector with notable acquisitions such as the Parus Business Center by Max Krippa and the Plant "Forge on Rybalsky" by Concorde Capital. As another example, the EBRD's significant $24.5 million investment, which will secure a 35% stake in the M10 Lviv Industrial Park, a modern multifunctional industrial park, in a joint venture with Dragon Capital.
Future Plans and Projects. Various investors continue to show confidence in Ukraine’s growth potential, with numerous ambitious investment plans announced for the coming years. For instance, the Turkish drone manufacturer Bayraktar plans to invest $100 million in three Ukrainian projects, and the Turkish construction contractor Onur Group targets a $500 million investment in the country. The EFI group has a $25 million project in sight for a new Feednova plant in Cherkasy region. Similarly, Holtec International and Energoatom plan to launch production of containers for spent nuclear fuel.
Evolving Legal Framework Shaping Ukraine's M&A Landscape
Environmental and Social Requirements. There is an emerging trend of including Environmental, Social, and Governance (ESG) elements in M&A transactions, establishing a new norm in Ukrainian business practices. ESG components are broadly a set of standards used to measure a company's environmental and social impact. One of the main drivers for incorporating ESG elements into M&A deals is the involvement of foreign institutional investors.
From a legal perspective, comprehensive ESG due diligence is emerging as a new standard in the Ukrainian market. This in-depth analysis leads to the formulation of detailed warranties and post-acquisition obligations for the target business, including requirements for regular ESG reporting and a strategic action plan for the implementation and enforcement of ESG policies, complete with clear and quantifiable objectives. The incorporation of these ESG elements into both the pre-acquisition and post-acquisition phases of a transaction not only reinforces regulatory compliance, but also underscores the target business's active commitment to sustainable practices.
In Ukraine, we have also witnessed the implementation of wartime measures, where investors require target companies to proactively develop and implement policies to assess and manage war-related risks to safeguard their personnel.
Purchase Price Adjustments. Considering the evolving situation in Ukraine's M&A market, the notion of a "buyer's market" requires a more sophisticated interpretation. Buyers currently find themselves with greater bargaining power, a consequence of the heightened risks and uncertainties stemming from the ongoing war. This power shift is reflected in the move away from the "locked box" model towards the "completion accounts", which allows buyers to conduct a detailed financial assessment at the time of deal closure.
Additionally, there is a noticeable trend towards incorporating deferred payment structures into deals, especially in private equity deals. Such structures often include earn-outs, which tie payments to the future financial success of the business, allowing buyers to align payment with actual business outcomes in a post-acquisition environment marked by uncertainty.
Despite these market conditions favoring buyers, owners of resilient businesses are reluctant to lower their valuations, reflecting their confidence in the enduring strength of their companies. This determination is particularly evident in buyout scenarios, potentially leading to a decrease in the number of such transactions. However, the landscape is more complex for minority investments. Here, sellers often view the onboarding of a reputable partner not only as a strategy to mitigate risks but also as an opportunity to unlock new business avenues and access international markets.
Additionally, many businesses with Ukrainian roots that have successfully expanded abroad do not strictly identify as Ukrainian entities. These companies, perceiving themselves as global players, are less inclined to concede to discounts solely based on their Ukrainian origins.
MAC Clause. We have also observed the trend of tailoring the Material Adverse Change (MAC) clause in M&A deals, specifically crafted for Ukraine's war-impacted business environment. This clause is typically designed to cover significant war-related risks, excluding general war effects, and it focuses on scenarios such as worsening conditions or territory occupation. This careful calibration balances the buyer's need for protection from severe unforeseen events with the seller's interest in a stable transaction.
Structuring. There is a slight trend favoring Ukrainian holding structuring by small to mid-sized companies over international holdings. This shift is driven by factors such as currency control limitations, high maintenance costs of international holdings, and enhancements in Ukrainian corporate legislation. Recent legal improvements have permitted, among other things, the incorporation of well-established English law mechanisms within shareholders' agreements governed by Ukrainian law and flexible corporate governance models.
However, Ukrainian businesses still lean towards well-known holding jurisdictions abroad, such as Cyprus. Today, the decision to choose these locations is less influenced by the favorable taxation and more by other considerations. These include property protection, judicial systems with established practices, and the capacity to invest from these holdings.
Conclusion
As Ukrainian businesses continue to adapt to the wartime environment and actively explore more avenues for expansion, the forecast for M&A activity in Ukraine for 2024 conveys a sense of cautious optimism. It is important to note that such M&A activity is closely tied to the developments of the war, the overall growth of the Ukrainian economy, and financial support from the EU and the USA.
By Bogdan Malniev, Partner, Andrii Kornuta, Manager and Artem Sinelnikov, Senior Associate, EY Law Ukraine.
Sources: EY Ukraine internal database, InVenture M&A report 2023
