Dissonant Optimism: Mergers and Acquisitions in the Bulgarian Technology Industry

Looking at the past 18 months, as economies across CEE contracted, the technology, media, and telecom sector has been surging. A balancing factor for economies, it helped avoid a deeper recession. For CEE law firms, TMT’s solid performance brought in a steady amount of work, helping polish what might otherwise have been a lackluster year.

Bulgaria is no exception to this pattern, as lawyers from some of the country’s top firms broadly concur. “In general terms, M&A in 2020 and the first half of 2021 were affected by a Covid slowdown,” said Nikolay Zisov, Partner at Boyanov & Co, with some transactions carried over from 2019 and many others “either delayed or outrightly abandoned.” Despite being slower in some sectors, M&A work has overall been stable, according to Ilko Stoyanov, Partner at Schoenherr, thanks to an increase on telecommunications and TMT in general performing well. This sentiment was echoed by Veronika Hadjieva, Partner at Kambourov & Partners: “With key deals taking place in all three sub-sectors – technology, media, telecoms – arguably the TMT sector has been the most active one deal-wise.” The sector has been “quite active in terms of M&A for the last three to four years”, Hristo Nihrizov, Partner at Dimitrov, Petrov & Co, pointed out, “with big transactions yearly, such as United Group acquiring Vivacom (2020) and then the Nova Broadcasting Group (2021).”

With business and life in general becoming more digital, Diana Dimova, Partner at Kinstellar, explained that “TMT has been the hottest sector in CEE, with more than a 50% rise in volume year on year. We have seen quite a lot of transactions. The pandemic has accelerated the development of technology companies, with the digitalization of some sectors and the expansion of e-commerce.” Violetta Kunze, Partner at Djingov, Gouginski, Kyutchukov & Velichkov, outlined three reasons for the technology, media, and telecom sector’s ascendancy: “The pandemic played a role. Then there were the milestone transactions of mobile players and media operators. But there was also a large number of transactions over the last 18 months – of strong technology and software companies and startups.”

Overall, “the TMT sector was the biggest winner, with an intense, sustained M&A activity,” Zisov also said. “TMT was already an appealing sector in pre-pandemic times,” noted Hadjieva, “with value-adding targets such as market-leading telecoms, top media groups, and innovative startups.” This, she explained, created “the perfect environment for M&A activity, through which companies could reinforce their market position and diversify. Subsequently, when the pandemic hit, as opposed to other sectors that were deeply disrupted, TMT, and in particular the technology sub-sector, thrived.”

A League of Its Own

There are key differences between the technology industry and its brethren in TMT: whereas Bulgaria is following global and regional trends on media and telecoms – vertical and horizontal integration, transnational capital, the emergence of three or four key players to dominate a market – the country is carving a path of its own making in tech.

“While past transactions would mean US or EU investment into Bulgaria, the more recent deals saw local startups beginning to go overseas,” said Kunze of recent developments and highlighted: “This is a good metric for the development of the tech sector, for how the local industry is growing. There are also local angel investors and there is local venture capital available to support tech-oriented companies from Bulgaria.”

There is a consensus that the COVID-19 pandemic has supercharged the technology industry. “Companies everywhere were faced with a pressing need for technology solutions to help them cope with, and adapt to, social distancing and the remote way of doing business,” noted Veronika Hadjieva. “This spurred deal activity in the [industry], as a way to foster growth and meet demand, especially in areas such e-commerce, food delivery, telehealth, IT security, SaaS.”

While past media and telecom transactions have relied on market share and infrastructure, “on the technology and startup side, it is harder to say what made them click” Violetta Kunze said, adding: “They are unique, either in the technologies they are developing, or the skillsets they employ. Financial technology was a common denominator for many of these recent transactions. Broadly, I would say they represented a good investment, offering the opportunity to expand globally or the prospect of a profitable exit.”

As to which technology startups attracted attention and why, Diana Dimova said: “Acquisition targets were usually well-marketed companies that made a good business impression and knew how to attract attention. They had good business models, were managed by capable people. Some were rather large, with 1000 employees and over. Overall, it is a sum of vision, proven business model and presentation,” adding that the deals usually made sense from a vertical integration standpoint.

Speaking about recent acquisitions, as part of the larger trend of “digitalization of news and consumption”, Ilko Stoyanov pointed out that the companies were targeted because of the products they had developed: “Unlike most past IT transactions, which revolved around developer teams, the buyer was primarily interested in the product, a unique technology that they wanted to release worldwide. Being able to expand the business model is also a plus.” He concluded that the “Bulgarian market is now mature enough to provide world-class solutions.”

Banks are becoming more active investors, especially in fintech, noted Hristo Nihrizov: “they are also running startup development programs and investing in tech companies.” This development is closely entwined with another focus of the technology industry, cybersecurity: “we expect that this topic will become even more relevant this year, and in the years to come,” said Nikolay Zisov. “Many local businesses invested in cybersecurity solutions, processes, internal policy improvements, and training.”

It Takes an Ecosystem

What gradually emerged through discussions about the technology industry in Bulgaria, is the idea of a stable ecosystem that connects companies and professionals to capital and an extensive support network, able to provide know-how and guidance for future development.

“This is one of the best-paid sectors of the economy, and wages are going up,” noted Stoyanov, adding: “Stability is actually incentivizing professionals to go out and start their own companies. The entrepreneurial trend is developing, and startup incorporation is not slowing down. In this more mature market, we see a lot of startup activity, and venture capital is gaining speed. There are virtually no entry barriers, and the only limitation is the insufficient supply of developers.”

Nihrizov confirmed there are several active, local venture capital funds that are providing support for the development of startups. And this is not necessarily a new development, either. Neveq, the first alternative management fund under Bulgarian legislation was “groundbreaking at the time of its launch in 2007”.

“Bulgaria is a very good destination for IT businesses, with a talented and educated workforce” Dimova noted. “The EU legal and regulatory framework currently adopted in Bulgaria is also a facilitator.” Technology companies and startups have managed to attract the attention of international strategic and private equity investors, as well as local venture capital funds, like Neveq, BlackPeak, Eleven, LauncHub, and Empower. She explained they offer funding for startups and have “helped a lot of companies in the early development stages. They have also managed some quite successful exits.” She described the Bulgarian technology startup ecosystem as led by young entrepreneurs, adding: “Apart from the VC funds, we have BASSCOM, an association of IT companies, as well as angel investors (including founders who have made a successful exit) who are all helping to develop and support the ecosystem.” Dimova attributed the technology industry’s rise in its GDP contribution, as well as the growing number of professionals returning to Bulgaria (as salaries are attractive and rising), to this ecosystem and its young entrepreneurs.

About the handful of Bulgarian funds supporting the tech sector, using a mix of private capital, state funds, and EU money, Kunze said: “They bring extra resources to support the local economy and rely on experts with a proven track record, with good business and market knowledge.” The ecosystem helps nurture innovation and technology and, when all is said and done, is a deal generator. “As a result, smart ideas are becoming an increasingly popular Bulgarian export,” she concluded.

Speaking about the structures now in place to support technology startup growth, Stoyanov mentioned the Bulgarian Private Equity and Venture Capital Association and the funds themselves. As a network, they are able to provide different tiers of funding, “from very, very early grants of USD 50.000, through several-hundred-thousand seed investments, up into million-dollar investments and beyond.” He added that “the ecosystem is also able to provide coaching and support – not just for technical skills, but for entrepreneurial ones as well.”

It is also worth mentioning that the law firms themselves form an active part of this support ecosystem. Advising on transactions is an important, but rather late step in their process. The first, frequently pro bono, steps variously include initial advice on how to set up a company, startup mentorship, partnering with incubators, accelerators, or innovation programs, and offering advice on projects, policy, regulatory aspects, or licensing procedures. “Supporting tech clients is quite an adventure,” Zisov concluded on the matter.

According to Stoyanov, while Bulgaria can still be regarded as marginal in many fields, that is no longer the case in the technology industry. While most conferences can be a bit boring, “DigitalK, an annual digital innovation event in Sofia, is world-class.” He concluded by saying: “The keys to a successful tech startup are vision and confidence. The market is easy to enter at this point, as there is freedom in building your own company.”

Striking a similar tone, Nihrizov advised: “The technology sector, while important for Bulgaria, is still comparatively small in global terms. One avenue for growth would be the Israeli model – invent, produce, and export it.”

No End in Sight

Speaking to trends and his expectations for the future, Nihrizov said: “the market is still open for business, more transactions are coming.”

“There is a lot of growth potential in the technology sector,” according to Zisov. He singled out banks, the digital transformation of which brings renewed interest in developing or acquiring financial technology projects. “Plenty of investors are showing an interest, especially in fintech projects. With new developments on the remote/hybrid regime of work, Software as a Service is also an attractive market. With other sectors seeing less growth and technology having a positive outlook, there is a lot of capital out there looking for good, interesting technology projects.”

Hadjieva also said she expects the positive dynamic to continue in 2021 and beyond. She zoomed in on past deals to identify areas of particular interest: app-based food-delivery services, telehealth, low-code technology (platform software that gives corporations the tools to develop apps internally, without developer talent), and, of course, e-commerce.

For Kunze, never-ending tech development is a given. As this is not slowing down, neither will M&A work in the tech industry, for the foreseeable future. She points to financial institutions and the accelerating role of 5G technologies, especially in healthcare, as factors of further growth.

Dimova offered that, based on the firm’s current pipeline, we are nowhere close to a peak in transactions: “We’re optimistic that we will see more and more deals. A compelling fact is that some companies are not looking to sell, but rather to expand. They themselves are looking to acquire assets outside of the country.”

Stoyanov also pointed out that, as a result of a maturing technology industry, “Bulgarian tech companies have themselves started acquiring foreign assets.” The bonus, he said, was that “we see young professionals returning to Bulgaria. We didn’t have a severe lockdown here and for many it was good to be back home.” He also noted that young people, especially those working in IT, “do not bear the burden of where they are born, and this empowers them. Unlimited internet plans on one of the fastest networks worldwide mean they can be anywhere, connected to anything.”

Bulgarian Optimism

As several partners felt the need to point out when speaking about their country’s technology industry, Bulgarians are usually a pessimistic bunch. Indeed, a 2009 Gallup World Poll places Bulgaria in the Very Pessimistic category, along with Haiti or Afghanistan. No matter if the economy is slowing down or picking up steam, Bulgarians routinely score near the bottom on the ‘Opinion on the situation of the national economy’ questions of the Eurobarometer (just 20% positive in 2019).

While Bulgarian pessimism may very well be real, none of it was apparent when speaking of the technology industry. There might even have been flashes of (cautious) optimism. As Ilko Stoyanov suggested, at one point during our interview: “We need good stories in Bulgaria, and this is a particularly bright spot. Not too big as of now, but a reason for optimism.”

This article was first published on CEE Legal Matters Magazine, 06.09.2021.
authors: Ilko Stoyanov, Diana Dimova, Hristo Nihrizov, Veronika Hadjieva, Violetta Kunze and Nikolay Zisov