The Polish transaction market continues to grow despite a difficult economic environment and keeps attracting investors’ interest. From 2020 to 2022, Poland held the top spot in the Central and Eastern Europe region in terms of both the number of M&A transactions and their value. The main investment motive for strategic investors is the acquisition of a customer portfolio, distribution channel, and a product or service portfolio. Financial investors, on the other hand, are primarily motivated by the potential profit from a planned resale and industry consolidation within their investment portfolio. The most attractive sector for investors in Poland will be the new technologies sector, according to a KPMG study in Poland titled “Characteristics of Transaction Processes in Poland”. Over the past 4 years, the time needed to carry out a merger or takeover transaction in Poland has significantly extended. The further development of the M&A market will depend on the availability of raw materials, energy prices, inflation and the implications of the ongoing war in Ukraine.
In Central and Eastern Europe, Poland once again was the largest M&A market in 2022. Despite numerous macroeconomic challenges, our market proved to be sufficiently strong and resilient to turmoil related to inflation or energy prices. Transaction value reached the highest level of the past decade – PLN 74.9 billion, marking an increase of one-third compared to 2021. In 2022, more than 340 mergers and acquisitions were carried out on the Polish market. The most attractive for investors in the Central and Eastern Europe region proved to be the energy market. Five out of nine of the largest M&A transactions in the energy and utilities sector in this region of Europe were conducted in Poland.
The investment motives vary depending on the type of investor. Among strategic investors, 40% of respondents ranked the acquisition of a customer portfolio/distribution channel as the primary investment motive, followed by the acquisition of a product/service portfolio. For financial investors, the key motives are profit from a planned resale and industry consolidation within their investment portfolio – over half (57%) of respondents indicated these reasons.
Specifics of Mergers and Acquisitions in Poland
The average transaction value declared by the surveyed differs depending on the two types of investors. Among strategic investors, for almost half of the transactions conducted the value is below PLN 100 million, while 16% exceed the amount of PLN 500 million. One-fifth of respondents admitted that no transactions were realized in the last three years. It’s worth mentioning that the timing considered starts from the beginning of the coronavirus pandemic. Financial investor respondents most often (43% of indications) participated in transactions worth between PLN 50 million and PLN 100 million.
The time it takes to carry out a M&A transaction on the Polish market from the date of first contact to the signing of the SPA agreement averages 10 months. A number of factors can influence the time difference, such as transaction complexity or the number of stages preceding its completion. Comparing the current results of the KPMG survey in Poland with the 2019 results, it is noticeable that the maximum time required to carry out a M&A transaction extended both for strategic investors (from 14 to 36 months) and financial investors (from 11 to 24 months).
M&A transactions have been carried out in much more volatile conditions since the COVID-19 pandemic. Every subsequent year brings new challenges, and the success of transactions depends largely on the parties’ determination to realize the transaction (including the acceptance of price levels deviating from initial expectations and levels from a few years ago), as well as on searching for transaction instruments (e.g., earn-out mechanisms) that make it easier to reach an agreement. It is difficult to expect the transaction environment to improve and stabilize in the near future, so entities considering selling or acquiring a company should execute their plans and do not postpone them. – says Tomasz Pasiewicz, Partner, Head of Mergers and Acquisitions Team in the Deal Advisory Department at KPMG in Poland.
Overstated selling price expectations most common reason for transaction failure on the Polish market
According to KPMG in Poland, the main reasons for failure to complete transactions may be perceived differently by the two investor groups analyzed. However, two thirds of strategic investors and all financial investors believe that the most common reason is the seller’s overstated price expectations. After the issue of seller’s price expectations, strategic investors declared that the changing economic environment and the problems and risks arising from due diligence were significant. Financial investors ranked the lack of preparation from the advisor’s side (more often than from the target’s side) and similar to strategic investors, the results of due diligence in terms of risk. Apart from the seller’s pricing expectations which they can’t influence, investors pay great attention to conducting due diligence as it helps identify significant risks in the company being the subject of a potential transaction.
For investors experienced in conducting capital investments in the Polish market, it will not be surprising that capital transactions often do not meet investors’ expectations. Failures concern both situations where, despite significant resources and time invested, the transaction doesn’t happen, and situations where unexpected problems arise after the investment target acquisition agreement is signed. Even though the conducted study doesn’t allow us to establish a remedy for all investor disappointments, the constantly important role of professional transaction advisors cannot be overestimated. The role of each transaction advisor when considering a capital transaction should be to identify significant risks associated with the potential transaction, estimate their potential impact on the target’s valuation, and determining appropriate remedial measures to limit or, if possible, eliminate the identified risks. During the completion of the transaction, a professional advisor protects the interests of the party they represent so that the final price of the target does not deviate from its previously established value – says Rafał Owczarek, Partner, Head of Transaction Advisory Team in the Deal Advisory Department at KPMG in Poland.
Economic Situation Influences Investor Decisions
From 2020 to 2022, the COVID-19 pandemic not only had an impact on decreasing the value of companies, but its economic consequences often led to shelving considered M&A transactions. Two-thirds of KPMG in Poland respondents believe that the pandemic has most negatively affected the tourism, gastronomy, and hotel industry. In 2022, the world markets were shaken by inflation and high interest rates. According to respondents of the KPMG in Poland survey, inflation had a most negative impact on the construction and real estate market (55% of responses). Retail and wholesale (53%) as well as tourism, gastronomy, and hospitality (52%) were ranked second and third.
The macroeconomic environment and the possibility of a recession in the upcoming months will likely negatively impact the M&A market, however, in a medium-term perspective, the forecasts are more optimistic. Mature companies (78% indications) and organizations in the growth phase (57%) will be the most attractive for investors in terms of potential M&A transactions in the near future. On the other hand, the new technologies sector is the most attractive in terms of planned M&A transactions (47% indications). In the upcoming months, many transactions can also be expected in the e-commerce, IT, healthcare, and renewable energy sectors.
The further development of the M&A market will depend on the availability of raw materials, energy prices, inflation, and the implications of the ongoing war in Ukraine. In the face of changing economic environment, based on the survey responses, the importance of the quality of management staff in terms of company adaptation to unpredictable events (89% responses) and the availability of employees with industry-specific experience in the labour market (76% respondents) is increasing in M&A processes. 75% of both strategic and financial investors tie great hopes with advanced technology for production/service provision, and with companies adapting to ESG criteria.
