2023 Turkish M&A market

Technology, media and telecommunications, industrial manufacturing and automotive, transportation, pharmaceuticals, and healthcare are expected to be among the leading sectors in terms of mergers and acquisitions in 2023.

The realization of strategic investments targeted by the Turkey Wealth Fund (TWF), the tender procedures of firms transferred to the Savings Deposit Insurance Fund (SDIF), and the launch of tender procedures for the assets in their portfolio by the Privatization Administration (PA) are among the factors that could increase transaction volumes.

Although the main determinant of M&A activity is investors’ appetite and risk perception, it can be observed that foreign investors’ interest in Turkey is increasing, especially for strategic industries. The fact that domestic firms seeking merger and acquisition opportunities are becoming part of the process may also increase transaction volumes.

Valuation Problem

It is also expected that some problems will be experienced such as the determination of the discount rate, the method to be used in the valuation, the number of years in which the cash flow or profit share will be reduced, the determination of goodwill, the fate of the employees, and the ‘information room’. Because of the high inflation period at domestic economy corporate valuation does not reflect the reality.

  1. Discount rate; Those who intend to buy due to the ongoing high systemic risk will find the country risk high and will want to keep the interest rate at which they discount cash flow or dividends high. Because the ‘Economic Value’ of the company depends on the growth power and risk of future cash flows.
  2. Valuation year; The period, which is generally 4-7 years, will reduce the number of estimated cash flows that are capitalized and the total cash flow will be low, as the economic uncertainties of the future years, long projections will not reflect the truth, and long forecasts will be very disconnected from the current economic situation.
  3. Share price; The financial statements that resulted in losses made the profit share discounting model unusable. While determining the price, the buyer party does not trust the future cash flows, and the seller does not want to sell his company cheaply in the current negative conjuncture. In our country, where it is difficult to find a comparable company multiplier, the fact that future cash flows are subjective and fictitious and the DCF method also discounts goodwill can lead to a divergence from reality.

However, at least for this period, the net asset value approach can be considered as a floor price.

Companies with high inventories and tangible assets can rely on this method.

Again, in some cases, the company’s turnover and EBITDA projections can be quite ambitious when

looking at the company’s past performances.

  1. Appraisal approach: Among the approaches such as book value, net asset value, discounted cash flows and profit share, company multiplier etc., DCF, which is the most used model in the normal period, does not give reliable results as a result of very low sales. Dividend discounting model does not yield results since there is no net profit, and the book value does not give healthy results, especially due to the fact that the cost values as a result of inflation are far from the fair value. In this case, it is of little importance to find a model that the buyer will agree with and the seller will agree with.
  2. Information room; It is a stage where the buyer learns about the important intangible assets of the seller, such as the customer list and know-how, which is also called the buyer’s private review. However, if the agreements are inconclusive, the seller may establish his own company with this information and continue on his way. In this environment where sales are difficult, no one wants to open their trade secrets such as their customer portfolio.
  3. Status of employees; Difficulties arise in negotiations as the buyer company sees it as the first savings item, but the seller company wants to find a formula for its employees who have devoted their years to it. Alternatives such as sharing the severance pay or deducting some of it from the sales price under certain conditions are evaluated.

In addition to the main headings above, control ratio, profit distribution ratio, valuation of intangible assets (copyright, patent, license, etc.), fixed capital investments that need to be made (need by the company), advances and orders received, relations between group companies and transfer pricing, tax planning and tax risks, ongoing lawsuits against the company, off-balance sheet liabilities, sureties and guarantees, investment incentives pose problems during valuation.