Is the M&A market facing a further slowdown due to the macroeconomic situation? Or, following the recent parliamentary elections in Poland, will the market quickly rebound after a brief pause and continue to experience the best economic period in modern history? Can we expect more records to be broken? The truth may lie somewhere in the middle, as there is no shortage of challenges lying in wait for the economy.
The M&A market is constantly changing and, although a number of transactions are still taking place, they are smaller in terms of value than in previous years. Apart from previously planned transactions, investors tend to take advantage of opportunities and temporary lower valuations.
According to industry reports and Wolf Theiss experts' observations, 2022 was a record-setting year for the Polish M&A market. Despite the lingering impact of the Covid-19 pandemic and the ongoing war in Ukraine on the economy, the value and volume of deals surpassed those recorded in 2021. Both sector investors, along with Polish and foreign private equity funds remained active in the market during 2022.
Wolf Theiss experts' observations show that, as in previous years, sector players and funds often competed in auction processes to acquire the same entities (targets). Moreover, there was unabated interest in transactions within the TMT, new technology, healthcare and biotechnology, manufacturing, and energy sectors.
This trend, albeit on a significantly reduced scale, is also evident in 2023. This can be attributed to the economic slowdown in Poland during the first half of the year, coupled with the market's anticipation of positive economic signals.
Market analyses also show that in global terms, both the volume and value of transactions have decreased in 2023. It can be assumed that global statistics generally correspond to trends in Poland.
M&A market participants seem to agree that the continued high level of inflation and issues with supply chains are significantly affecting the market. At the same time, there are reports of some targets being withdrawn from sales processes in the face of increasingly unfavourable valuations.
On the other hand there is still a shared belief that in the short term, the market will once again become highly dynamic. In view of the significant funds raised by private equity funds in previous years, it is estimated that these funds will remain active and seek new transaction opportunities.
Although the global trend does indeed influence the evaluation of Poland's situation, it is quite evident that despite the overall decrease in the global transaction value, numerous transactions are still being finalised. This may be an effect of diversification and capital's search for attractive valuations. Certain assets have been overvalued due to ongoing macro and geopolitical challenges, including the repercussions of the so-called Polish Deal (a new tax setup introduced in Poland in 2022), with the latter factor only applicable to a group of smaller companies. In the face of uncertainty, funds and strategic investors are also reducing their risk by focusing on smaller assets. As a result, many transactions can still be expected, although we will not necessarily witness any new records in terms of the M&A market's value in Poland. An additional factor that clearly has a cooling effect on the Polish market is the tightening of banks' credit policy and the still relatively high interest rates.
ESG has been one of the important trends in this market for some time. Investments in green energy, 'ethical business' companies and the transition away from fossil fuels are simply inevitable at this point. Market participants already see a number of positive aspects associated with the sustainability trend. Indeed, ESG investments for example, have high reputational as well as purely financial benefits in terms of expected returns. Changes in this respect can also be observed in the consultancy sector as consultants have started to offer services involving ESG-oriented research of potential targets. One surely hopes that the trend of searching for and carrying out socially and environmentally beneficial transactions will become a permanent feature of the Polish economy to reflect global trends.
Another aspect to consider when assessing the M&A market is national policy. However, according to experts at Wolf Theiss, this does not seem to be a factor that significantly affects the M&A sector in Poland. In their opinion, despite occasional high political tensions in Poland's history, investors have generally maintained a level of detachment, indicating that these political disputes have not significantly influenced their business decisions. The formation of a new government and the possible unblocking of funds from the National Recovery Plan (part of the EU Recovery Plan) will have a stimulating effect on the M&A market and the economy as such.
In the unanimous opinion of the experts at Wolf Theiss, the still unsettled geopolitical situation and the radically increased level of economic interventionism by governments is a global phenomenon and not an exclusively Polish trend. In this context, in their view, investors do not treat the aforementioned factors as specific only to the Polish market and do not consider it immune to negative external stimuli. A response to the multidimensional uncertainty of the situation and the complicated circumstances of the judiciary in Poland may be the widespread phenomenon of submitting potential disputes, resulting from M&A transactions to arbitration tribunals. From our observations, both in 2022 and in the current year, arbitration provisions have enjoyed unabated popularity. Undoubtedly, a much more substantial threat impacting the M&A market is the elevated inflation rate and the central bank's interest rate policy, which adversely affect financing conditions in particular.
By Izabela Zielinska-Barlozek, Krzysztof Libiszewski, and Anna Dabrowska, Partners, Wolf Theiss
