There are many attractive acquisition opportunities in Poland for middle sized Nordic companies
There are many attractive acquisition opportunities in Poland for middle sized Nordic companies
Poland became attractive for large Western companies already in the 90-ties. Nordic companies like Orkla, Statoil, Nordea, Rieber & Son, Skanska, ESAB, ABB and Danish Crown acquired big, previously state owned, privatised companies, invested a lot of resources not least in management capacity and have reached a good position on the market as well as good profitability. Today Poland has become attractive also for middle sized companies since the business situation is very much different from the first decade of free economy.
The best and quickest way to establish operations in Poland is by an acquisition. Starting instead an own subsidiary takes long time and the probability for success when growing organically is extremely low. The Polish market has had and still has a splendid development – especially due to all EU subsidies and direct investments - and this has created many new good acquisition opportunities.
Many Polish private companies were established at the end of the 80-ties or beginning of the 90-ties. About 20 years later, companies are in generation shifts. The owners are now either in the age close to retirement or after many years of hard work and long working hours want to decrease their engagement. In many cases their children are not interested to take over thus the companies are or will be for sale. Companies have good results but need more capital and know how for further growth and consequently the owners tend to have an open attitude to business investors.
Especially companies and people from Nordic countries are welcome. Due to historical reasons Poles are not very fond of their continental neighbours. Poles have positive track record and opinion about Nordic countries.
Quite recently Nordic private equity companies started to discover Poland. Our firm has helped a few of them to add Polish companies to their existing portfolio companies. Often there are substantial synergies in sourcing and production to benefit from. More and more however the impressive growth pace of the Polish market in volume and value weighs in considerably in the interest to acquire.
It is easier to make acquisitions after Poland’s entry into EU
Of course, it is not easy to make a successful acquisition. When a good target is for sale many investors are interested and most often the target is sold in a bid auction. A bid auction is often the preferred solution for the seller. The price tends to get higher when investors are competing about the same target.
For the buyer, it is the opposite – it is certainly much better to approach the seller before the official sales process and if the parties agree the bid auction will never start. This is feasible if the buyer knows well Polish market and business culture.
A very important question is about speed in decision making. Poles – the owners, often at the same time also being operating managers – are quick decision makers. Nordic companies unfortunately take very long time before deciding. It is far from only a matter of difference between a big and well organized company, with defined working procedures, meeting the flexible local entrepreneur. It is very much a cultural difference as well. We have experienced situations when the Nordic company was still discussing internally whether it was the appropriate time to approach the target. Meanwhile the Polish company was sold.
Nordic companies are generally interested when we approach them with an acquisition opportunity in Poland but are often slow to act. They do not realize how attractive the targets are for many international buyers. Acquisitions are usually a matter of opportunity in time.
Another difference with mergers and acquisitions in Poland compared to the Nordic countries is expectations on each other. A Polish company owner expects to get a well prepared proposal when the Nordic managers instead of presenting a proposal “are open for different solutions”. We have met several Nordic companies travelling around Poland on and off during several years, meeting companies, drinking coffee but never made an acquisition.
So the question is how to succeed with an acquisition.
To start with it is easy to find companies in different businesses. Since Internet was created it is enough to press some buttons to get long lists with company names, addresses and some key figures. Chambers of commerce, business associations and similar organisations can assist as well. Due diligence and agreements are also relatively easy to carry out. All big law firms and auditing companies are present in Poland. All have well qualified professionals, speaking splendid English.
Valuation of the company and negotiations with the owner are however more complicated. Independently of valuation method – both discounted cash flow and multiples are applied – the owners usually have very high expectations on the price and are often tight emotionally involved in the company. It can be difficult to find a solution satisfying both parties. It facilitates if both seller and buyer have engaged advisors and the advisors can discuss different questions, which are not tactical to address directly to the other party. Otherwise negotiations easily come to an unsolvable dead lock situation. Since the Polish owners generally lack experience from M&A, they don’t know what to be done to get to a deal. Nordic managers are not too good in helping either. They generally know what to be done but they have references from the Nordic countries and communisation with the Polish owner does not work.
Poland is attractive for Nordic companies due to certain reasons
Poland is a big and quickly growing market, one of the large EU members, with 38 million consumers, developing at twice the rate of Western Europe. Poland is by far the biggest Baltic Rim market having more than seven times more consumers than in Norway. GDP and living standard become better and better and at least 10 million Poles have the same living standard as Swedes.
While there is a general set down in the world economy, Poland is not as affected as other countries, it is still an impressive growth economy. The inflow of industrial capital is immense. The infrastructural investments in front of the European championship in football 2012 are impressive. In addition Poland will until 2015 be the largest beneficiary of EU funds.
Poland has lower labour cost inflation than both Estonia and Latvia, on a similar level as Lithuania. Extra attractive are economical zones where companies get certain advantages when locating production including national and EU subsidies. It is coming as a surprise for many foreigners that the trade union membership rate in Poland is very low.
Geographic neighbourhood and well functioning transports facilitate logistics and make just in time system possible. This is especially interesting in product areas where Asia can’t compete because of physical distance. Neighbourhood and good flight connections facilitate for Nordic management to teach and control the outsourced production especially for complicated goods of specified high quality level.
Craftsmanship, technical, medical and IT competence are in Poland generally on high level. Especially the generation under 35 has very good education and skills, including English. In addition, due to high unemployment and very low social subventions, people have very high motivation to work hard and improve their competence.
Today it is quite safe to make business with Polish companies or to make acquisitions. Poland entered into the EU in 2004 and has adjusted most of the business and juridical rules to the Western standards. Due to the EU membership, safety in doing business has as well increased. There are similar requirements on Polish companies regarding book keeping and auditing as in Nordic countries. Accounting principles, profit & loss statements, balance sheets, etc are also more or less looking the same. Company valuations and due diligences are made in the same way as in Western countries.
For certain industries it is more relevant to consider Poland as production base than for others. Poland is for example a very good choice for industries where access to skilled professionals for R&D and production is vital. The same for manufactures of products expensive to transport like building materials (roofs, insulation, joineries like windows and doors), machinery, furniture, white home appliance, boats and yachts. Food is another group where quality and overnight transports make Poland attractive, like for meat, processed fish, grains and dairy products. Another area, which is attractive for the Nordic industry, is the service sector, for example IT and call-centres. Here high education / competence and low payments make Poland very competitive.
We have a long experience from M&A in Poland
We have been working with Poland since beginning of the 90-ties and transactions since 2001. In most of cases our clients made quite successful acquisitions. Two clients however asked for our help to withdraw from the market.
One was a large petroleum company, which after a few years in Poland, wanted to leave the market. The Polish operations consisted of about 85 retail stations and a wholesale business with several depots. Despite a turnover of more than 1 billion SEK it did not reach break even – a quite usual problem for petroleum companies. Unfortunately, no one in Poland was interested in buying both retail stations and the wholesale business. The solution was to split the company and sell the retail stations to a large Nordic company and wholesale to a Polish.
The second client who decided to leave Poland was a big Nordic confectionary firm. The reason was internal and not related to Poland. Due to certain circumstances the Polish subsidiary should be closed down. The problem was to handle almost 400 employees and strong trade unions. It was a challenge as they were demanding 52 months salary compensation to all employees, threatened to strike and national news media were not late to attend. The case was really difficult to resolve however we helped our client to pay only four months compensation, sell the assets and help the buyer to employ back more then 100 of noticed the people and start confectionery production again, also producing for our client.
All our other clients have made acquisitions. One of our most satisfied clients is a large Nordic private equity company. From a Polish co-operation partner we got information that one of the biggest distributors of medical products would be for sale. The private equity company had a big medical distribution company in their portfolio, so the fit was more or less perfect. The client did however not prioritize the proposed target initially, when he could get exclusivity form the beginning, but came back a couple of months later. Than the bid auction process was already ongoing.
It took us a lot of work and even more creativity to find a solution, but it was worth all the efforts. Today our client is a satisfied owner of the target and next time when we find another target fitting to one of his portfolio companies he will look at the target at once.
Another good example of a successful acquisition is a Polish cosmetics company that our client acquired a few years ago. Poland – already since the 50-ties - was developing and producing cosmetics for the whole Eastern Europe so the competence level of the companies was high, also in an international comparison. Our client acquired a relatively small but quickly growing company with good products and creative marketing. Today the Polish subsidiary is one of the most profitable parts of the company and our client is interested in additional acquisitions.
Facts talk
It is no exaggeration to say that Poland is one of the fastest growing economies in Europe, GDP is quickly growing and inflation is going down. The legal environment is compatible with Western standards, which facilitates for foreign investors.
A strong Polish economy is the best guarantee for return on investments. In 2006, GDP grew by 5.8% - which was caused among other things by the growth in Foreign Direct Investments. Their value in 2006 exceeded 15 billion EUR, which is the best result compared to all other new EU member states.
The favourable picture of the Polish economy is also influenced by the fact that inflation is kept under control. A decrease of inflation has been noticeable since the early 1990s. Another result of the positive economic changes is the falling level of unemployment.
GDP growth in 2007 was 6.6%. The forecasted increase in GDP for 2008 is 5.5%, whereas for 2009 it’s 5.0%. According to the IBnGR, maintenance of growth at a minimum level of 5% over the coming years - bearing in mind the recent slowdown of economic reforms - must be viewed as a success.
Poland is by far the biggest growth opportunity market for Nordic companies in the Baltic Rim region, natural to include into a new home market definition for Norwegian, Swedish, Finnish and Danish companies.
If you want to learn more facts and figures about Poland, please visit our web page www.lmab.nu
Lantz & Martensson AB act as business advisors to top management of big Nordic companies in acquisitions as well as in divestments related to businesses in Poland. L&M advises the clients through the entire transaction process including identifying and selecting acquisition targets, valuation of the targets and the market and by supporting in negotiations. Our aim is to maximize opportunities and minimize risks.
