Finland: Upwardly mobile
7 October 2013 | By Christian Metcalfe
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Microsoft’s acquisition of Nokia has dominated the Finnish headlines. It signals a new chapter for the country’s business opportunities
With not just one but three big deals stamped with Nokia’s name this year, the deals market in Finland is resurgent. And combined with a lively bond market and a continued focus on technology it means there is almost no time to consider further consolidation in the mid-tier market.
It is unclear whether the recent global surge in corporate M&A deals is the result of the threatened rise in interest rates and the end of cheap borrowing or an increased appetite among private equity firms producing a good climate for firms re-evaluating their assets.
But what matters in Finland is the sale of the mobile operations of Nokia to Microsoft for €5.5bn (£4.6bn). The company is the subject of much national pride, having almost single-handedly pulled the small Nordic state out of economic trouble in the 1990s to secure its place on the global tech map.
In a separate €1.6bn (£1.3bn) deal set to complete early next year Microsoft also agreed to license Nokia’s patents and mapping services.
The deals were preceded earlier in the year by another large deal involving Nokia when it agreed to buy Siemens’ 50 per cent stake in their joint venture, Nokia Siemens Networks, for €1.7bn (£1.4bn).
At its strongest, Nokia contributed a quarter of Finnish growth from 1998 to 2007, while its spending on research and development made up 30 per cent of the country’s total. Generating nearly a fifth of Finland’s exports in the decade to 2007, Nokia was sometimes paying as much as 23 per cent of all Finnish corporation tax.
However, in recent years, thanks partly to the ascent of Apple, the company’s fortunes have faltered and Finnish lawyers are pragmatic when considering what the Microsoft deal means for Finland.
“I can only see it as a positive,” says Tomi Merenheimo, managing partner of Magnusson Helsinki. “There have been too many years spent bowing in the Nokia direction with government decisions being made on the basis of just one company. Now everybody has got to be active, not just one, so it’s good for Finland.”
And what is good for Finland appears to also be good for Nokia.
“Mobile phones made Nokia weaker and weaker,” points out Merenheimo, “but now it can concentrate on making strong networks and developing those services that are not just tied into one platform.”
In a similar vein, Bird & Bird Helsinki managing partner Jori Taipale welcomes not only the new opportunities resulting from the takeover but also “the bigger muscles” with which the combined company can now fight Apple and Samsung.
The Finnish market is not all about Nokia. Firms are looking forward to strong year-on-year growth for 2013 and beyond.
“Our workload is 40-50 per cent more than this time last year,” says Merenheimo.
Other firms appear to be following suit. Bird & Bird reports year-to-date growth of 15 per cent following a 17 per cent revenue rise last year, and Borenius is on budget for “substantial growth” according to managing partner Jari Vikiö.
Although there is a growing sense of positivity in the market, Hannes Snellman’s Helsinki managing partner Mikko Heinonen sounds a note of caution.
“The uncertainty may not be about tomorrow but rather the day after tomorrow – that is a negative factor affecting business and the transactional market in general,” he says. He sees a “valuation gap” between what buyers are willing to pay and what sellers are asking, causing some deals to fail.
In addition to the three large corporate deals involving Nokia, Dutch brewer Heineken sold its Finnish business Oy Hartwall to Danish Royal Unibrew for €560m (£470m), and Swedish private equity firm EQT agreed to buy Finland’s largest healthcare services company Terveystalo from British peer Bridgepoint for a reported €650m (£550m).
The technology and engineering-dominated Finnish economy is an attraction to investors both in Europe and the US, says Heinonen.
“The biotech boom in the US has also generated some waves across the Atlantic and on to Finland,” he adds, noting that he has seen recent activity from investors in biotech startups.
Meanwhile, the other traditional pillar of the Finnish economy, the paper and pulp industry, is going through a transformation.
“There is a lot of discussion about the future of the paper and pulp industry,” says Castrén & Snellman managing partner Pauliina Tenhunen, pointing out potential avenues of diversification. “They’re finding out whether renewable fuels and other products could compensate for the paper part.”
The financial services industry has also seen strong growth, in particular in bonds – a market that was “almost non-existent before banking regulation elevated the price of lending from banks,” observes Krogerus partner Mårten Knuts.
He adds that while there has not yet been acquisition finance from bonds, “it has been on the drawing board and will happen before too long – that will again fuel the transactional market more”.
While Nordic banks are ‘open for business’ and lending, the popularity of bonds appears to be partly down to the tight conditions imposed by banks and the desire of clients to decrease their dependency on lender banks.
Nokia again grabbed the headlines when it made the largest bond issue of the year, securing €1.5bn from Microsoft ahead of the transaction’s closing by issuing a series of bonds to Microsoft.
Two bond issues more representative of market activity are VVO Group issuing a €100m bond sec-ured by Finnish residential properties, and corporate housing investor SATO Corporation making a second bond offering under its €500m sec-ured note programme. SATO will use the proceeds to invest in property in Helsinki and St Petersburg.
Unlike corporate and M&A, real estate continues to be quiet.
“The damage was worse in that area,” says Taipale. “Real estate transactions tend to be Excel sheet-driven, mathematical things and when they collapse it takes a lot of time to recover, and many of the investors aren’t there anymore.”
In the absence of investment there has been a shift towards development, with projects such as Google’s seawater-cooled data centre built in a former paper mill in Hamina and major zoning projects in Helsinki still providing solid legal work.
Again, however, Nokia cannot be ignored, having agreed to a €170m sale and leaseback of its glass and steel headquarters in Espoo near Helsinki.
With economic problems in southern Europe highlighting stability in the north, there has also been increased investment activity in infrastructure, claims Vikiö.
“Profit levels in infrastructure are quite steady and investors are seeking a safe haven for their money,” he says.
Dispute resolution is “blooming” according to Krogerus managing partner Juha Pekka Katainen. He points to continuing work flowing from two huge antitrust cases involving alleged cartels in the asphalt and paper industries that have seen significant enforcement actions over the past year.
New arbitration rules introduced in June will make Finland “more competitive and better placed to settle disputes,” reports Heinonen.
“The process has been modernised and is very effective in terms of time and cost – large-scale arbitration matters that used to be dealt with in Sweden or Switzerland will in future be arbitrated in Finland.”
According to data from the Arbitration Institute, as of last month it had received 68 requests for arbitration, compared to 69 requests made during the whole of 2012, which was itself a record year in terms of the number of new cases.
The Finnish legal market itself has also seen significant consolidation in the mid-market, the most recent development being the merger of firms Juridia and Bützow last month to create a firm with a projected 2013 turnover of around €28m (£24m) and over 100 lawyers.
“When times get tough these things happen. Mid-sized firms are being squeezed by the bigger full service firms and then also by the smaller boutiques, some of which are proving very successful and profitable. Expect to see more of this type of thing,” predicts Taipale.
Heinonen sees a stark choice for such firms – either open as specialist boutiques or go large-scale.
But even when the choice is made there is still much to be done, particularly if previously playing in a different market.
As the youngest of the big five firms in Finland, Krogerus, which was established in 1992, knows better than most what that journey requires.
“Of course with their combined strength they will try to get to the same market where we and the other big firms in Finland are,” observes Katainen. “Anything is possible if they have the right people in place, they have good management and they can build up a ‘one firm’ culture.”
Key figures: Finland
GDP (2012): $250bn
Annual inflation: 1.2%
Population (2012): 5.4m
Life expectancy at birth: 80
Unemployment rate: 7.1%
Source: World Bank, Statistics Finland