Recently Poland was ranked third among the best countries to invest in post-COVID ‘new normal’ reality by CEOWORLD Magazine. So a high ranking position is a good starting point to make some prognosis concerning the Polish economy. These remarks are made from the perspective of an international M&A lawyer, for more than 20 years dealing with inbound investments and cross-border M&As.
From this perspective, the current situation of Polish private companies may in some respects be similar to that of Polish state-owned enterprises in the 1990s. In the last decade of the twentieth century, due to the opening up of the Polish economy, it turned out that these state-owned behemoths were unable to compete with efficiently managed foreign companies. The appeal of the products of Polish companies fell rapidly compared to imported products, often bearing a more or less recognizable logo.
Today, we can see that a number of Polish companies, which have a significant share of the domestic market and offer attractive products in terms of price and quality, are crushed by debt. The high debt level is, inter alia, the result of the necessity (and possibility) of operating over the past 20-30 years in the open market and free competition conditions. Until the pandemic and the resulting crisis, domestic companies maintained the capacity to pay their liabilities on an ongoing basis, which often required considerable discipline.
In other words, the dynamic growth of Polish private companies was (and is) based on credit and without a special financial “safety net”. The pandemic and its economic consequences have disturbed the delicate balance.
So, to paraphrase a term from the global economic crisis of 2008-2009, the Polish private companies mentioned here are not too big to fail. At the same time, they are small enough to be a potential and relatively cheap object to be taken over by entities which, during an economic crisis, are able not only to meet current needs and pay liabilities but also retain the ability to expand.
And here we see similarities to the 1990s. Companies particularly affected by the crisis, as long as they show a certain “development potential”, are a tasty morsel for expansionary investors. In the case of Poland, this attractiveness is due, e.g. to access a local market of almost 40 million people and a location at the east-west and north-south crossroads. For investors from outside the EU, Poland is an interesting place to start expanding onto EU markets, providing access to, in total, 450 million potential consumers/EU residents.
For neighboring countries, the motives for capital investment in Poland may vary – from the optimization of production or service costs (moving certain production processes or services to Poland due to the still relatively low labor costs) to the need to sometimes appear on the market of a large EU Member State, which has, inter alia, a reputational value.
The weakening Polish zloty, combined with the hitherto quite good level of local consumption and the often advanced technologies used in Polish companies, has only increased the attractiveness of acquisitions in Poland.
In other words, the crisis may lead to fairly well-developed Polish private companies, having a significant share of a sizeable local market, becoming attractive acquisition targets for those who have the funds to leapfrog business development through M&A investments.
Acquisitions may, therefore, involve companies representing industries that are well developed in Poland, but which are considerably dispersed. There are a significant number of good, modern companies, each of which is, deprived of “critical mass” for various reasons. These include unresolved succession issues, through outdated management methods, to the desire to maintain the family nature of the company at all costs. Now the effect of such strategies (or frequently, the lack of a far-reaching strategy) for the development of the companies can be painfully seen. As indicated by research carried out by the Polish Business Centre Club, the time that such companies can continue to survive the current market situation is about three months. It is worth adding that, at the time of writing this text, barely 60 days have passed since the significant freezing of the economy.
Two differences from the 1990s should be noted here. First, Polish companies tend to be much stronger (better organized, offering much better products and services) than state-owned enterprises were in the final stage of the People’s Republic of Poland at the end of the 1980s and the beginning of the 1990s.
Second, the source of the capital used to fund an acquisition may be different nowadays. During the period of intensive privatization in the 1990s, western corporations operating in a particular industry often acted as investors.
It seems that the pandemic and the sentiments aroused by it may mean that these western industrial concerns may not show significant interest in investing in our country in the short and medium-term. As many of them are at present struggling with their own difficulties, it is hard to expect them to allocate funds for acquisitions in Poland in the indicated horizon.
In the medium term, Polish private companies will rather become objects of interest for investors with high “critical mass” (giving, inter alia, resilience against the effects of the crisis) and a long investment horizon (“investment patience”), or entities professionally engaged in such acquisitions.
The first group includes Asian entities – including Chinese and Korean – looking for expedient ways to enter the European single market. In the 1990s, companies from Western Europe and the USA, which are culturally closer to us, played a similar role.
The second group includes professional investment funds, including those from financial centers with moderate objectives and resources, i.e. from Stockholm, Munich, Vienna, Prague, Madrid, and Tel Aviv.
Although it may sound shocking, from the perspective of these two investor groups, Poland is in a way again becoming an emerging market.
Therefore, while attempts to implement administrative protectionist measures to impede (discourage?) investors from outside the EU taking over Polish companies are not surprising, it is difficult to imagine similar actions against EU entities. At the same time, this protectionism may of course have undesirable effects: although the company will not fall into Asian, American, or Swiss hands, it will be annihilated, leaving behind it unemployed workers and unpaid creditors. As Dr. Marek Dietl (CEO of the Warsaw Stock Exchange) recently said in an interview, in terms of capital accumulation per capita, Poland is four times less wealthy than Greece and 14 times less than Germany. Dr Dietl, therefore, concluded that “we are dependent on imported capital (…)”. (rp.pl, 23.04.2020).
All this leads to the conclusion that, if the M&A market is shut off to foreign investors, the internal market will be closed, resulting in companies operating on this market losing their competitiveness.
And that means a return not so much to the vibrant M&A processes of the 1990s, but to the gloomy reality of the 1980s.