Thanks to its rapidly expanding and diverse economy, Poland is becoming an increasingly attractive destination for mergers and acquisitions (M&A). This makes it an excellent place for investment.
If you don’t fully understand the M&A landscape of Poland, however, there can be many risks involved.
In this blog post, we’ll cover everything you need to know to make better investment decisions and successfully expand your business in Poland. We’ll explore:
- Trends and driving forces behind Polish M&A activity
- Why M&A has been booming in the last three decades
- What opportunities and risks to watch out for.
Let’s dive in!
Table of contents
- Resilient M&A Deal Flows – Encouraging Uptick in Recent Years
- Substantial Strategic Investments and Vibrant Private Equity Scene
- Growing Share of Cross-Border M&A Deals
- Significant Interest from USA, UK, and German Buyers
- M&A Deal Volumes Doubling Across Multiple Sectors
- Resilient and Fast-Growing Economy
- Growing Labor Available at ⅓ of Western European Salaries
- Diversified Economy
- A Key Player in the Global Trade Market
- Economic Growth Promoted by International Organizations
- Rising Price Levels
- Interest Rates Above Historical Levels
- Changes in Exchange Rate
- Strong History and Encouraging Outlook
- Why You Should Work with a Local M&A Advisor in Poland
M&A Overview: Steady Growth Momentum in All Areas
Resilient M&A Deal Flows – Encouraging Uptick in Recent Years
Poland has been ranked numerous times as the country with the highest number of M&A deals in Central and Eastern Europe over the past decade.
Traditionally, M&A volumes in Poland have remained relatively stable. In 2021, however, this all changed.
But let’s go back a bit.
Between 2016-2018, M&A activity in Poland softened after investors were concerned about the changing political landscape. In 2020, the market was slow due to the pandemic outbreak. Even during these challenging times, however, M&A activity in Poland exhibited resilience and bounced back swiftly and quickly.
2021 was an exciting year for the mergers and acquisitions market in Poland, reaching a new record-high of 302 deals over 12 months. As the economy regained its footing after a series of interest rate cuts and stimulus packages, businesses across various sectors turned their attention to growth. This led to a surge in both horizontal and vertical acquisitions thanks to the favorable macro environment. eCommerce received the most attention as online shopping took over brick and mortar retail, but other COVID-19 winners, such as healthcare, also fared well.
Despite the uncertainties driven by rising inflation, interest rates, and the conflict in Ukraine, we have yet to see a drop in M&A activity within Poland. Thanks to a robust first half of 2022, led by a flurry of deals in services and computer software, this year is on track to set a new record for the number of M&A transactions.
Substantial Strategic Investments and Vibrant Private Equity Scene
Over the analyzed period, strategic investments accounted for the lion’s share of total M&A transactions in Poland.
The country’s fast-growing consumer spending has encouraged both local and foreign businesses to expand their market presence through mergers and acquisitions. Poland also boasts a wealth of innovations that buyers opted to acquire instead of developing in-house. Additionally, the fragmented nature of most industries in Poland has provided strategic buyers with a large pool of potential targets to choose from.
Private equity firms have emerged as the most active financial investors in Poland. While private equity deals demonstrated slow but steady growth over the analyzed period, this trend was broken in 2020-2021. During this period, we saw a remarkable rise in private equity activity compared to the earlier years.
Boosted by a sense of optimism amongst investors, private equity firms capitalized on the attractive acquisition opportunities offered by the Polish market. Alongside private equity, there has also been growing interest from venture capital firms among financial investors.
Growing Share of Cross-Border M&A Deals
Over the past ten years, cross-border transactions as a percentage of total deal flows have steadily increased, showcasing the growing interest of foreign buyers in the Polish market. This interest can be attributed to:
- Robust economy & favorable market: Poland offers a combination of a cost-effective but highly-skilled labor force as well as a large customer base.
- Currency exchange rates: For buyers based in locations with stronger currencies (e.g., USD and EUR), the favorable exchange rates have a noteworthy effect on valuations, resulting in a discount compared to their home markets.
In 2021, the number of cross-border M&A deals surged to unprecedented heights as foreign buyers were drawn to the strong rebound of the Polish economy. While the days of easy money are behind us, we have yet to see cross-border transactions slow down in 2022. Foreign buyers continue to show interest in Poland, driven by the desire to enhance revenue opportunities, realize cost synergies, and gain access to new technologies.
Significant Interest from USA, UK, and German Buyers
Among the countries in Central and Eastern Europe, Poland stands out as a hotspot for foreign investors. The pool of investors is led by buyers based in the USA and Western European countries, but we also see growing interest from investors in the Czech Republic and Sweden.
Delving deeper into the preferences of investors from these top three countries, we can find their specific areas of interest:
- USA-based investors: Were active in acquisitions across all sectors. Key areas of interest were computer software (27 deals), consumer food (11 deals), and medical (eight deals).
- UK-based investors: Most active in the energy sector, with 17 deals in the last ten years, followed by financial services (13 deals) and software (11 deals).
- German investors: The top target sectors for buyers based in Germany were industrial products and services (12 deals), energy (11 deals), and eCommerce (eight deals).
M&A Deal Volumes Doubling Across Multiple Sectors
Over the last several years, Poland has witnessed a remarkable uptick in mergers and acquisitions deals across multiple sectors. Leading the charge are computer software, energy, and other services, with notable performance from other sectors, such as medical.
- Computer software: This was by far the fastest-growing industry in M&A deal volumes, increasing by 17x since 2013. While already benefiting from digitalization trends, the computer software industry skyrocketed even further with the pandemic in 2020. Poland, in particular, attracted substantial foreign interest due to its large number of SaaS and IT Services companies.
- Energy: The energy sector came in second, with annual M&A deal volumes growing from 14 in 2013 to a record high of 43 in 2021 and 38 in 2022. The lion’s share of this growth came from renewable energy deals, particularly those in solar energy. Growing interest in renewables is fuelled by increasing prices of traditional energy sources and a series of environmental regulations.
- Other services: This category encompasses a range of business activities that cannot be categorized elsewhere. Unlike the steady growth in computer software and energy, M&A deal flows in other services were less consistent. Frequent acquisition targets included companies offering education, consulting, and financial services (e.g., debt collection).
Conversely, there has been a significant drop in M&A activity within the consumer retail sector. This industry has been steadily losing ground against eCommerce, a trend that accelerated during the pandemic. M&A deal volumes in consumer retail dropped from 21 in 2013 to just 8 in 2022.
Looking at the total mergers and acquisitions volumes over the last decade, the ‘other services’ category took the lead with 229 transactions.
In second place is the industrial products and services sector, a significant contributor to Poland’s economy due to its industrial activities. As the above chart displays, however, M&A activity in this sector has been declining. We anticipate the fast-growing computer software sector to take the lead in the near future.
The energy industry, led by renewables transactions, and the medical sector, led by life sciences transactions, also demonstrated strong performance during this period.
Attractive Macro Environment: Why Invest in Poland
Resilient and Fast-Growing Economy
As of 2021, Poland’s GDP reached a historic high of $674 billion. This makes it the 21st-largest economy in the world and the 10th-largest in Europe.
Poland has a recession-proof economy with a strong track record of uninterrupted high growth. During the last two global market downturns, the country was a shining star within Europe. Poland didn’t register any recession during 2007-09, and in 2020, its real GDP growth contracted by only 2.0%. This was significantly less than the European Union and OECD averages of minus 6.0% and minus 4.5%, respectively.
Despite being in the middle of ongoing geopolitical tensions due to the Russian invasion of Ukraine, Poland’s economy has been relatively stable so far. The country achieved positive YoY GDP growth in the first three quarters of 2022, and analysts forecast this trend to continue.
Implications for M&A in Poland
Poland, like many other economies, exhibits a positive relationship between GDP growth and mergers and acquisitions activity. This can be attributed to a few key factors:
- Confidence in market growth: Company founders are more likely to engage in M&A transactions when they hold a positive outlook for future market growth. This confidence fuels their willingness to expand their businesses through strategic acquisitions.
- Robust labor market: A strong GDP often coincides with a robust labor market, generating disposable income that helps keep demand at an adequate level.
- More financing opportunities: In favorable economic conditions, as seen in Poland over the last few decades, financial institutions are more willing to lend and borrowers have better access to foreign capital. This makes it easier for companies to obtain financing for M&A deals.
Impact of Global Market Slowdown on the M&A Landscape in Poland
As the global economy appears increasingly uncertain, it’s important to remember that M&A activity can remain viable. In fact, market slowdowns can present unique opportunities for those who approach with the proper screening and due diligence. Here are a few examples:
- Finding attractive opportunities: Companies struggling with finances can look to merge or sell off parts of their business for a much-needed influx of funds. Meanwhile, savvy buyers can pick up good deals at lower prices due to more attractive valuations. Opportunistic and distressed acquisitions are typical in such economic environments.
- Poland’s shifting landscape: Poland has been a seller’s market for a long time, but it seems the tide is turning. Buyers who were once held back by lofty valuations are returning to the market. At the same time, sellers who have grown accustomed to premium pricing are adjusting their expectations. This sets up an ideal environment for M&A deals.
Growing Labor Force Available at ⅓ of Western European Salaries
Poland has the largest population in Central and Eastern Europe with approximately 38 million residents. The country’s labor force participation has remained solid and stable, strengthened by the country’s appeal as a destination for international students and workers. Additionally, the large influx of Ukrainians is expected to boost Poland’s labor force by 1.0%-2.25% and add 1.5%-2.5% to its working-age population.
A key selling point of Polish labor to foreign buyers is its low cost relative to most of the other members of the European Union. According to Eurostat, the hourly labor cost in Poland in 2021 was EUR 11.5, in contrast to the European Union’s average of EUR 29.5. This represents a 61% cost advantage.
Poland is one of the most prosperous members of the European Union in terms of employment. Steady economic growth has created a wealth of job opportunities, attracting leading multinational companies to the country. These companies are drawn in by an impressive workforce known for delivering high-quality services at competitive costs. As a result, the country’s unemployment rate has steadily declined over the years and dropped below the European Union average in 2016.
Implications for M&A in Poland
A strong labor market with low unemployment usually indicates a thriving economy. In such an environment, businesses have confidence in their future performance and look for ways to grow – prompting an increase in mergers and acquisitions. High employment rates typically also result in higher disposable income, driving a growth in demand that encourages businesses to increase their offerings and production volume.
The relatively cheap talent pool in Poland also has powerful implications for cross-border M&A. For buyers based in Western Europe, for example, investing in Poland means a 60-70% “discount” on labor costs compared to their home country.
Poland has a fast-growing diversified economy with a healthy balance amongst various core sectors, including services, industry, construction, and agriculture.
Services: Services have contributed significantly to Poland’s economic growth, accounting for 59.4% of total gross value added (GVA) in 2021. Trade and motor vehicle repair have historically been the largest contributors, though their role has decreased in recent years as new-age tech-related activities have increased. Human health, social work, and financial institution activities have also seen considerable growth in this sector.
Industry: Industry-related activities, particularly manufacturing, also constitute a significant portion of Poland’s GVA, representing 25.1% as of 2021. Within manufacturing, the automotive field stands out as a pivotal contributor to Poland’s economic growth. Thanks to the country’s rich mineral resources, mining activity is also significant and draws multiple foreign buyers, including Germany, to actively acquire companies from this segment.
Construction & Agriculture: While the construction and agriculture sectors account for a small and slowly declining share of GVA, it’s important to note that real estate activities, supported by residential real estate, are holding up well within the construction sector.
Diverse opportunities for M&A in Poland
Poland’s diverse economy offers great merger and acquisition prospects for buyers in any sector. While most M&A transactions in the country took place in the service industry, particularly in the tech sector, it’s important to note that tech-related industries weren’t the only attractive target for mergers and acquisitions. For example, good M&A activity was also seen in the manufacturing and real estate sectors.
Poland as a Key Player in the Global Trade Market
Thanks to its efficient and high-quality production, Poland plays an active role in international trade. As one of the largest trading partners in Europe, the total value of Polish exports reached $319 billion in 2020, with $252 billion coming from the export of goods and $67 billion from services.
Western European countries are the primary importers of Polish goods, with Germany at the forefront, accounting for over ¼ of total goods exported. Other European countries, such as the United Kingdom, Netherlands, Czech Republic, and France, are also active importers of Polish goods. Polish products are also making some headwinds in overseas markets, primarily in the United States, China, and Turkey.
Export Strength & its Implications for M&A in Poland
High export activity usually signifies a healthy economy that supports business growth. This frequently results in increased volumes of mergers and acquisitions transactions. Acquiring companies with operations in foreign countries becomes an attractive avenue for expanding internationally and diversifying customer bases.
Additionally, countries with high global trading activities tend to follow general international trading rules and requirements, such as those relating to product quality or employee working conditions. This can be particularly valuable for foreign buyers with less knowledge of local laws and regulations.
Economic Growth Promoted by International Organizations
Poland is an integral member of key international organizations, such as the European Union, NATO, IMF, World Bank, and World Trade Organization. These strategic memberships offer several advantages that can increase M&A activity within the country.
Firstly, being a part of the European Union allows Poland access to the large and affluent European market. This simplifies trade and employment across borders, making the country an attractive destination for international students and workers. It also promotes common regulatory and legal frameworks with well-established financial institutions that help to level the playing field and encourage cross-border M&A.
Secondly, membership in specific organizations, such as the EU, offers significant beneficial financial grants and assistance. Since joining in 2004, Poland has received over EUR 213 billion from the European Union to promote sustainable growth and create new jobs.
Macro Factors to be Aware of
Rising Price Levels
After years of low inflation, Poland has witnessed a rise in price levels since the second half of 2021, reaching 18.0% in October 2022. This inflation was triggered by the COVID-19 era supply chain bottlenecks and stimulus-boosted demand and has significantly accelerated in 1Q 2022 following the Russian invasion of Ukraine.
Price levels are expected to peak in late 2022 and stabilize by the second half of 2024. Higher prices have been challenging for both businesses and consumer sentiment, however Poland’s economy has proven its resilience once again as it continues to hold up well.
Impact of Inflation on M&A in Poland
Higher inflation can have numerous implications on mergers and acquisitions activity in Poland, including a focus on real growth, valuations of target companies, and more extended exclusivity periods.
Focus on Real Growth
Throughout the due diligence process, when a company’s financial health is analyzed, buyers usually assess the company’s growth by focusing on revenue. In periods marked by elevated inflation, many firms may demonstrate strong growth in monetary terms but not in volumes, especially in sectors less sensitive to price fluctuations, such as energy, commodities, or consumer staples. It is therefore essential to dive deeply into the sources of growth and understand whether the target’s expansion is genuine in real terms.
Elevated inflation often leads to inflated operating expenses due to higher input and energy costs. Combined with ongoing wage inflation and supply chain issues, this can put significant pressure on profitability and therefore valuations. Target companies that cannot pass on higher costs to their customers are at risk of going up for sale at a discount compared to those that can.
Longer Exclusivity Periods
Buyers may request extended exclusivity periods to allow for more detailed due diligence reviews. A typical area that draws close scrutiny during periods of high inflation is the target’s pricing power and pricing arrangements with its suppliers. This includes assessing whether the company has locked in a favorable pricing provision from its supplier and has the market power to raise prices in line with inflation.
Interest Rates Above Historical Levels
Low interest rates encourage business and consumer spending, which translates into economic growth. In Poland, the trajectory of interest rates has been marked by significant shifts.
- Historical decline: Interest rates have steadily declined since 2003, falling to 0.1% following the pandemic-led cuts in 2020 to protect the economy.
- Turning point in 2021: This trend ended in 3Q 2021 when 11 consecutive rate hikes were implemented in order to combat inflation and the depreciation of the Polish Zloty. As a result, the interest rate in Poland increased from 0.1% to 6.75% between October 2021 and September 2022.
- Promising future: Though the rate hike measures were tough, they were also effective. We are now seeing multiple promising signs of improvement, including a swift recovery of the Zloty, which is close to pre-war levels against the EUR and USD. Inflation is expected to peak in early 2023 and analysts forecast it to stabilize by the second half of 2024.
A stable interest rate that aligns with the central bank’s long-term inflation target is the most favorable landscape for mergers and acquisitions. The typical impact of rapid rate hikes and higher rates on the M&A landscape evolves around valuation and change in the method of deal financing.
Higher Cost of Capital
Higher interest rates mean a higher cost of debt for financing mergers and acquisitions. This makes debt-financed transactions, such as leveraged buyouts (LBO), less attractive. It can also result in buyers proposing alternative payment methods that require less cash to be paid at closing time. Alternative payment tactics include installment payments, promissory notes, earnout/revenue milestone payouts, rollover equity, or payment via other equitable assets.
A higher cost of capital can also weigh on valuation if the target is highly leveraged or has poor coverage ratios. Businesses will be left with less cash after interest payments and are also at a higher risk of defaulting on their debt obligations. Liquidity, solvency, and coverage metrics should therefore be closely examined during due diligence processes.
A Decline in Equity Financing
When interest rates rise, stock prices usually fall as investors shift their money into bonds and other fixed-income securities. This makes it more difficult for companies to finance an acquisition with equity, as they would need to sell more shares to raise the same amount of capital.
As a result of lower share prices, stock swap M&A deals may fall out of favor. A stock swap occurs when shareholders’ ownership of the target company’s shares is exchanged for shares of the acquiring company. It’s unlikely that the acquirer will use stock as a means of transaction financing if its share price is trading notably below fair value.
Change in Exchange Rate
Thanks to Poland’s strong economic growth, the fluctuation of the Polish Zloty (PLN)’s value has been relatively low following the 2008 financial crisis. This trend ended in February 2022 when Russia invaded Ukraine, and the PLN went into a free fall for several months. Factors such as rising geopolitical risk, high local inflation, and unprecedented interest rate hikes by central banks played a significant role in the currency’s depreciation.
In October 2022, the PLN regained its footing thanks to stabilizing markets and a series of interest rate hikes. While there is still some room for improvement, the value of the Polish Zloty is close to recovering to pre-war levels against the EUR.
Implications for M&A in Poland
A stable currency usually supports mergers and acquisitions growth as it builds business and consumer confidence. It also makes forecasting future performance and managing transaction risks easier. When a currency depreciates, it can lead to more inbound M&A transactions, but it can also weigh on FX-adjusted performance and valuations.
Increased Inbound M&A
Poland has been an attractive destination for cross-border M&A deals as foreign strategic investors and private equity firms want to reap the benefits of the country’s fast-growing market and relatively cheap labor. A weaker PLN can lead to more cross-border transactions as buyers from western regions can effectively acquire local companies at a discount.
Focus on FX-Adjusted Performance
Many exporter companies will report strong growth in sales volumes during a period of currency depreciation, while companies relying on imports might need help transferring cost increases to their consumers. During due diligence, buyers must therefore identify whether or not a change in financial results has come from a temporary exchange rate effect.
Impact on Valuations
Depending on the company’s operations and financial position, currency depreciation can positively or negatively impact its valuation. Companies that don’t rely on imports, have no foreign debt, and have foreign cash reserves are likely to trade at a premium.
The currency used for calculating valuation as a part of an M&A deal (e.g., earn-outs) may also be changed to a more stable currency. In such a case, it’s essential for both the buyer and seller to have a clear understanding of how the exchange risk is distributed.
Summary of M&A in Poland
Strong History and Encouraging Outlook
Throughout the past three decades, Poland has achieved consistent economic growth, with its capital, Warsaw, becoming the business center of Central and Eastern Europe. Poland’s well-diversified economy has proven to be one of Europe’s fastest-growing and most resilient to global headwinds. The country benefits from a sound macroeconomic framework, low-cost labor, corporate-friendly tax and law systems, and significant investment by foreigners and the European Union.
As a result, M&A activity has been booming in the country. Poland has ranked #1 numerous times in Central and Eastern Europe in terms of M&A deal volumes and total transaction value, a trend that we expect to continue.
While the country’s tech-related industries have seen the most rapid growth in recent years, we also saw a steady uptick in deal volumes across various sectors, led by software, energy, and other services. Strong momentum was also observed in both strategic and financial acquisitions, private equity in particular, and encouraging growth in cross-border M&A, with the USA and UK leading the pack.
Poland is currently facing numerous headwinds, and as a result, analysts forecast slower economic growth in the years ahead compared to pre-pandemic levels. However, investors remain bullish on the country thanks to its diversified and resilient economy and expect faster growth than the more developed western peers. We, therefore, see continued momentum and opportunity in the Polish M&A market.
Why You Should Work with a Local M&A Advisor in Poland
The growing number of M&A deals in Poland has increased demand for M&A advisors across strategic investors and private equity firms. M&A advisors provide invaluable expertise and guidance, from finding businesses for sale to doing due diligence and helping close the deal.
Engaging a Polish M&A advisor is especially crucial throughout the due diligence process. In the context of due diligence of a Polish company, it is imperative to evaluate the target company’s financial, legal, and tax facets. Depending on the specificities of the target and its industry, further due diligence areas may include IT/cybersecurity, market, operational, and environmental. Partnering with a Polish M&A advisor can help navigate the complexities of due diligence in Poland and arrive at informed decisions.
Although looking at high-level trends can provide a good overview of the market, it’s often not enough to find the best mergers and acquisitions opportunities for you. Working with an M&A advisor allows the necessary insight to find the best match for your business. An M&A advisor can offer critical insights into which industries and companies are on the rise and could be ideal matches for you and your organization. Utilizing an advisor’s in-depth knowledge can maximize your chances of finding the best opportunities to grow your business.
For cross-border transactions, understanding each country’s unique business cultures and practices for successful M&A acquisitions can take time and effort. Working with a Polish M&A advisor helps the foreign party understand the market dynamics and legal and regulatory framework. It also helps you overcome language and cultural barriers. With their assistance, you can confidently pursue international deals with peace of mind knowing that you have an experienced partner on board assisting you every step of the way!
Aventis Advisors Will Help You Navigate the Polish M&A Landscape
At Aventis Advisors, our team accumulated significant know-how in helping international buyers navigate the unique complexities of investing in Poland. With our experience in bringing together foreign investors and Polish targets, you can trust us to take care of all your investment needs – from understanding complex financial requirements to bridging cultural gaps!
Contact us if you want to learn more about M&A in Poland. We would be happy to answer any of your questions and find the best deals for you.