Poland is becoming an increasingly attractive destination for mergers and acquisitions (M&A) thanks to its rapidly expanding and diverse economy.
With its vast expansion opportunities, it’s an excellent place for investment. However, many risks are involved if you don’t fully understand the M&A landscape of the Polish market.
This blog post will uncover everything you need to know to make better investment decisions and successfully expand your business in Poland. We’ll explore the trends and driving forces behind the Polish M&A activity, why it’s been booming over the past three decades, and what opportunities and pitfalls you should watch out for. Let’s dive in!
Table of contents
I. M&A Overview: Steady Growth Momentum in All Areas
- 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
II. Attractive Macro Environment: Why Should You Invest in Poland
- 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
III. Macro Factors to Be Aware of
- 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 ranked #1 numerous times in Central and Eastern Europe as the country with the highest number of M&A deals over the past decade. Volumes were relatively stable until the blockbuster year of 2021. We saw some softening between 2016-18 as investors got spooked by the change in the political landscape and 2020 due to the pandemic outbreak. However, even during these years, M&A activity in Poland remained strong and, on each occasion, made a swift and robust recovery.
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 turned their attention to growth. We saw a series of horizontal and vertical acquisitions thanks to the favorable macro environment. eCommerce received the most attention as online shopping took over brick and mortar, but other covid winners, such as health care, also fared well.
Despite the uncertainty caused by the rise in inflation and interest rate and the war in Ukraine, we have yet to see a drop in M&A activity within Poland. Thanks to a robust first half of the year led by other services and computer software deals, 2022 will set a new record for the number of M&A transactions.
Substantial Strategic Investments and Vibrant Private Equity Scene
Strategic investments accounted for the lion’s share of the total M&A transaction in Poland over the analyzed period. The country’s fast-growing consumer spending has encouraged local and foreign businesses to expand their offerings through mergers and acquisitions. Poland is also home to numerous innovations that buyers opted to acquire instead of developing internally. Additionally, most industries are fragmented in Poland, allowing strategic buyers to select from a large pool of potential targets.
The most active financial investors in Poland are private equity firms. Throughout the analyzed period, private equity deals grew slowly but stable. This trend was broken in 2020-21 when we saw a remarkable rise in private equity activity compared to the earlier years. Boosted by investors’ optimism, private equity firms capitalized on the attractive acquisition opportunities offered by the Polish market. Among financial investors, besides private equity, we also see a growing interest among venture capital firms.
Growing Share of Cross-Border M&A Deals
Analyzing the changes over the past ten years, cross-border transactions as a percentage of total deal flows have increased steadily. Interest by foreign buyers is underpinned by Poland’s robust economy and favorable market environment. Among the many benefits you can unlock by expanding in Poland, the country offers a cheap but highly-skilled labor force and a large customer base. Also, for buyers based in stronger currency locations (e.g., USD and EUR) the favorable effect of exchange rates on valuations effectively results 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 in by the strong rebound of the Polish economy. While the days of easy money are behind us, we have not seen a slowdown in cross-border transactions in 2022. Foreign buyers continue to show interest in Poland to enhance their revenue opportunities and cost synergies and gain access to new technologies.
Significant Interest from USA, UK, and German Buyers
Among the countries based in Central and Eastern Europe, Poland has been a hotspot for foreign investors. The pack is led by buyers based in the USA and Western European countries, but we also see a growing interest from the Czech Republic and Swedish investors.
Taking a closer look at the buyers’ interest from the top three countries, the 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). On the other hand, buyers from the UK were most active in the energy sector, with 17 deals in the last ten years, followed by financial services (13 deals) and software (11 deals). Lastly, 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
We have seen a remarkable uptick in mergers and acquisitions deals across multiple sectors over the last several years in Poland. Computer software, energy, and other services are leading the pack, but other sectors, such as medical, have also achieved notable performance.
Computer software was by far the fastest-growing industry in M&A deal volumes, increasing by 17x since 2013. While the industry was already one of the key beneficiaries of the digitalization secular tailwinds, demand for computer software skyrocketed following the onset of the pandemic in 2020. In addition, Poland has attracted substantial foreign interest as it has a large number of SaaS as well as IT Services companies.
Energy came in second place, 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 growth was attributed to renewable energy deals, particularly to firms operating in the solar energy space. Strong interest in renewables is fuelled by the higher prices of traditional energy sources and a series of environmental regulations.
Other services contain a mix of business activities that cannot be categorized elsewhere. Unlike computer software and energy, where we saw steady growth in M&A volumes over the recent years, deal flows in other services were less consistent. Frequent acquisition targets included companies offering education, consulting, and financial (e.g., debt collection) services.
On the other hand, we saw a significant drop in M&A activity within consumer retail. The sector has been steadily losing ground against eCommerce, a trend accelerated by the pandemic. Deal volumes in the industry have dropped from 21 in 2013 to 8 in 2022.
Looking at the total mergers and acquisitions volumes throughout the past decade, other services took the lead with 229 transactions. In 2nd place is the industrial products and services sector, as industrial activities make up a significant portion of Poland’s economy. However, as the above chart displays, M&A activity in this sector has been declining and we expect the fast-growing computer software sector to take over in the near future. Energy led by renewable and medical led by life sciences transactions also performed strongly.
Attractive Macro Environment: Why Invest in Poland
Resilient and Fast-Growing Economy
As of 2021, Poland’s GDP reached a record high of $674 billion, making 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 are forecasting this trend to continue.
Implications for M&A in Poland
Usually, there is a positive relationship between GDP growth and mergers and acquisitions activity, and Poland is no exception. This is because company owners are more willing to engage in M&A transactions to expand their business when confident in future market growth.
When GDP is strong, it’s also likely that the country has a robust labor market, thus generating disposable income to keep demand at an adequate level. Lastly, during good economic times, like we have seen in Poland over the past decades, financial institutions are more willing to lend, and borrowers also 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 world is staring into a gloomier outlook, it’s important to remember that even in an economic downturn, M&A activity can still be seen. In fact, with the proper screening and due diligence, attractive opportunities can be found. Companies struggling with finances may look to merge or sell off parts of their business for a much-needed influx of funds, while savvy buyers can pick up good deals at lower prices due to more attractive valuations. Opportunistic and distressed acquisitions are typical in such environments.
In Poland specifically, after decades of economic success, it has been a seller’s market for a long time. Now it seems the tide is turning. Buyers held back by lofty valuations are returning to the market, while sellers who have become accustomed to premium pricing are tempering their expectations – setting up an ideal environment where deals can be done.
Growing Labor Force Available at ⅓ of Western European Salaries
Poland has the largest population in Central and Eastern Europe at approx. 38 million. Labor force participation has been solid and stable, strengthened by the fact that the country is an attractive destination for international students and workers. Additionally, the large inflow 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, in 2021, the hourly labor cost in Poland was EUR 11.5 vs. the European Union’s average of EUR 29.5 – that’s a 61% discount.
Poland is one of the European Union’s most prosperous members in terms of employment. Steady economic growth has created a wealth of job opportunities and leading multinationals have flocked to the country, drawn in by an impressive workforce that delivers high-quality services at competitive costs. As a result, the unemployment rate has been steadily declining over the years and has been below the European Union average since 2016.
Implications for M&A in Poland
A strong labor market with low unemployment usually means the overall economy is doing well. Such an environment favors mergers and acquisitions as businesses have confidence in future performance and therefore look for ways to grow. High employment typically also means higher disposable income, thus growth in demand that will encourage businesses to increase their offerings and production volume.
The relatively cheap talent pool 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 split between the different core activities of services, industry, construction, and agriculture.
Services have dominated the growth story, accounting for 59.4% of total gross value added (GVA) in 2021. Trade; repair of motor vehicles is the most significant contributor, albeit dropping in recent years as new-age activities related to tech are stepping in its place. We saw considerable momentum in human health, social work, and financial institutions activities as well.
Industry-related activities, primarily manufacturing, also comprise a large chunk of Poland’s GVA – 25.1% as of 2021. Within manufacturing, the automotive field is a pivotal contributor to Poland’s economic growth. Mining activity is also relatively high thanks to the country’s rich mineral resources. Multiple foreign buyers (e.g., Germany) are actively acquiring companies from this segment.
The construction and agriculture components of GVA have been relatively small and declining slowly. However, it’s important to note that real estate activities are holding up well within the construction segment, supported by residential real estate.
Implications for M&A in Poland
Poland’s diverse economy can offer good merger and acquisition targets for buyers in any sector. Unsurprisingly, most of the M&A transactions took place in industries that fall under services, particularly companies related to tech. However, it’s important to note that tech-related industries were not Poland’s only attractive mergers and acquisitions targets. For example, we also saw good M&A flows in manufacturing and real estate.
A Key Player in the Global Trade Market
Thanks to its highly efficient and good-quality production, Poland plays an active role in international trade and is one of the largest trading partners in Europe. In 2020, the total value of Polish exports reached $319 billion, with $252 billion coming from the export of goods and $67 billion from services.
The largest buyers of Polish goods are Western European countries, with Germany leading the group, accounting for over ¼ of total goods exported. Other European countries, such as the United Kingdom, the Czech Republic, France, and the Netherlands, 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.
Implications for M&A in Poland
High export activity usually means a healthy economy that supports business growth, thus, higher mergers and acquisitions volumes. Acquiring a company with buyers based in foreign countries is also an ideal solution for expanding internationally and diversifying your customer base. Lastly, countries with high global trading activities tend to follow general international trading rules and requirements – e.g., 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 positions mean Poland enjoys several advantages that can translate into higher M&A activity in the country.
For one, membership in the European Union gives access to a large and affluent European market, allowing businesses to trade and employ workers easily. Poland is an active global trade member and 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.
Lastly, membership in some organizations (e.g., the European Union) 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
Rising Price Levels
Following years of low inflation, price levels in Poland have constantly been rising since the second half of 2021, reaching 18.0% in Oct-22. Inflation was triggered by the covid-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 weighed on business and consumer sentiment, but the overall Polish economy has held up well, proving its resilience once again.
Implications for M&A in Poland
Higher inflation can have numerous implications on the mergers and acquisitions activity in Poland. The usually impacted areas include a focus on real growth, valuations of target companies, and more extended exclusivity periods.
Focus on Real Growth
Throughout the due diligence processes, when analyzing a company’s financial health, buyers usually assess the company’s growth by focusing on revenue. In times of elevated inflation, many firms will be able to show strong growth in monetary terms but not in volumes, especially in price-insensitive categories, such as energy, commodities, or consumer staples. It is thus essential to deep-dive into sources of growth and understand whether the target is growing in real terms.
Most companies face inflated operating expenses due to higher input and energy costs. Combined with the ongoing wage inflation and supply chain issues, this can put significant pressure on profitability and therefore valuations. Target companies that cannot pass through higher costs to customers are at risk of going up for sale at a discount compared to companies that can.
Longer Exclusivity Periods
Buyers may request more extended exclusivity periods to allow time to perform a more detailed due diligence review. A typical area that comes into the spotlight during high inflation is the target’s pricing power and pricing arrangements with its suppliers. For example, 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. The rates in Poland have steadily declined since 2003, falling to 0.1% following the pandemic-led cuts in 2020 to protect the economy.
However, 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 has increased from 0.1% to 6.75% between October 2021 and September 2022.
Though the rate hike measures were tough, they were also effective, and we are seeing multiple promising signs of improvement. The Zloty has made a swift recovery and is close to pre-war levels against the EUR and USD. Inflation is expected to peak in early 2023, and analysts are forecasting it to stabilize by the second half of 2024.
Implications for M&A in Poland
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
A higher interest rate means 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. Therefore, liquidity, solvency, and coverage metrics should be closely examined during the due diligence processes.
A Decline in Equity Financing
When 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 in the value of the Polish Zloty (PLN) has been relatively low following the 2008 financial crisis. This trend broke 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 rip the benefit 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. Thus, during the due diligence, buyers must identify whether the change in financial results has not 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 do not 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 saw a steady uptick in deal volumes across various sectors, led by software, energy, and other services. We also saw strong momentum 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 are forecasting 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 raised the 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 the due diligence and helping to close the deal.
Engaging a Polish M&A advisor is especially crucial when undertaking due diligence. In the context of due diligence of a Polish company, it is imperative to evaluate the target company’s financial, legal, and tax facets. In accordance with the specificities of the target and its industry, further due diligence areas may include IT/cybersecurity, market, operational, and environmental. By partnering with a Polish M&A advisor, one can effectively navigate the complexities of due diligence in Poland and arrive at informed decisions.
Although looking at high-level trends can give 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 gives the needed 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 will also help 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.