Navigating the storm: turn back or wait it out?


M&A market in Poland and CEE
“They expect the M&A business to progressively bounce back once the outbreak is contained,” says Piotr Kucharczyk, M&A Director at JP Weber, about the sentiment among his western European colleagues. But what’s the climate like around the M&A market in Poland and CEE?

Business confidence in Poland had already dropped in February after falling to 1.6 points from 3.2 points in January, according to Statistics Poland (GUS). The figures are bound to plunge even further in March as the COVID-19 pandemic continues to spread and wreak havoc on global markets. Investment, hiring and expansion plans have been put on ice as businesses tread water and search for liquidity. But what about the big deals in the M&A market? Are prospective investors tearing up contracts at the 11th hour? Are sellers looking to offload assets when they can or remaining patient until prices rebound? We talked to Kucharczyk to see how the local M&A market has reacted so far and what the prospects look like for the future.   

How has the M&A market in Poland and CEE reacted to the COVID-19 pandemic? Have you observed any effects yet? 

Sadly, yes. The pandemic is already affecting the M&A market in Poland and beyond. According to UNCTAD’s latest data, the world will witness a sharp decline of 5-15% in global FDI due to the outbreak. After a weak February, when the number of M&A transactions in Europe dropped from 658 a year earlier to 418, there will be a much stronger collapse in March and April.

We can also see the slowdown in our everyday work. In the panic, some want to exit their investments as soon as possible while others prefer to wait for better times – and better prices. Already a month ago, one of my clients – a financial investor, fearing market behaviour – wanted to exit his investment as soon as possible. The other sellers postponed their decisions to go through the process because they were afraid that they might face some difficulties with the implementation of business development forecasts in the following months. On the other hand, we are in the process of purchasing an international company for a Polish investor. After several months of work, offers, due diligence and negotiations, a contract was due to be signed in the next two weeks, but the Polish client will probably suspend the transaction until further notice.

Looking ahead, how do you see the crisis developing over the course of the year?

Generally, I would say we can divide the effects of the pandemic into two groups: ‘hard’ effects related to the impact on a company’s profit and loss line and the ‘soft’ effects related to the physical limitations around social interaction.

When it comes to the ‘hard’ effects, businesses that were presenting attractive medium and long term growth prospects are now scrambling to analyse the current impact of the coronavirus with both direct and indirect consequences. Companies simply feel insecure. When they face difficulties in maintaining the liquidity of their own business, few dare to invest or contemplate any take-over opportunities.

As a consequence of the pandemic, companies and private equity funds are exercising caution, holding decisions on M&As, as historical and current trading performance is overshadowed by sensitivity analysis. Investment targets are affected in the short or medium term, making it difficult to set their equity value. For deals that do continue, there will probably be a greater deal of conditionality with, for example, the return of material adverse change (MAC) clauses and earn-outs. Also, private equity funds have turned their focus back to diligently working on their portfolios, assessing operational and cost flexibility, modelling short term cash flow scenarios and speaking to suppliers and banks to ensure they have the liquidity to navigate the months to come.

When it comes to ‘soft’ pandemic effects, one might think that professional services (e.g. work on M&As) or transaction advisory services can easily do without personal meetings and carry out their work with the use of new technologies. But this is just not true. Direct contact with people when searching for potential targets or negotiating contracts simply cannot do without a personal meeting. Many countries literally closed their borders, so people stopped travelling. This means we are not allowed to attend nor organise M&A conferences where we usually map and analyse potential M&As in the region with our global partners. We also hear about business owners and advisors being tested positive with COVID-19. It’s impossible to work normally.

What about Poland specifically? Have you seen any differences here compared to other markets?

One thing we have picked up is an interesting contrast in behaviour between our colleagues in Poland and western Europe. Being a founding member of Eight International [a global advisory organisation made up of 600 professionals from 16 countries], we at JP Weber can see that our Polish colleagues have reacted more strongly to the prospect of a recession than our western European friends, who tend to treat the pandemic as an exogenous shock and not a systemic one. They expect the M&A business to progressively bounce back once the outbreak is contained.

Do you see a downturn across the board or will certain sectors do better than others?

It is clear that some sectors will be hurt much more than the others. Industries like tourism, gastronomy, transport and logistics are the first to feel the impact of imposed restrictions on the mobility of people, cars and planes around the world. Nevertheless, all industries should witness a global slowdown, some directly and some hit by ricochet. Take the IT industry, whose services can easily be delivered remotely. But IT service providers will be affected by the overall recession as their clients may postpone or cancel planned orders – or even ongoing orders – depending on the financial turbulence they experience.

And what’s your outlook for the local M&A market and the wider economy?

The situation is definitely temporary and will hopefully change quicker than expected. The remedy to withstand this market environment should come from the banks, both central institutions in each country and commercial institutions. The National Bank of Poland has already taken certain efforts to support operations and the liquidity of commercial banks, whose fundamental role should be to ease the financial liabilities burden by lowering the interest rates, postponing credit instalments as well as providing some temporary overdraft solutions to strengthen the liquidity positions of companies. The government should also contribute by prolonging the terms of payments for VAT as well as income taxes. 

On the other hand, entrepreneurs should take care of their businesses by securing supply and sales channels and managing the invoices they both owe and are owed. Financial health will be key to exiting the current turbulence without major injuries.

Industry expert

Piotr Kucharczyk, CFA, is M&A Director at JP Weber. He has over 10 years of international M&A and corporate finance experience, covering a broad scope of assignments including company sales and acquisitions, MBOs and capital raisings. He currently works across a wide range of sectors, such as manufacturing, services and the pharmaceutical industry and has a specific focus on the new technologies.  He is a member of both M&A Worldwide’s IT, Software & Internet industry group and JP Weber’s multidisciplinary team, Smart Tech, which is dedicated to the IT sector.

Piotr Kucharczyk, M&A Director at JP Weber
February 17, 2020
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