Q1 Do growth strategies lean more towards acquisitions rather than organic growth during economic turmoil? Are you seeing any trends in M&A as a business growth strategy?
These times of economic instability (especially recession and inflation) and ongoing conflicts do not serve the stability in the market and may adversely affect the number of M&A transactions as any appraisal and evaluation of a company may change out of the blue, due to unpredictability of developments on the market. The acquisition of other businesses is still an important factor in implementing growth and avoiding the decline of business and even insolvency. When it comes to the Polish market, Poland remains a hotspot within M&A Transactions in the CEE region as the Polish M&A market has been able to build resilience and development in contrast to global ups and downs.
The M&A landscape shows new trends that can be of interest for further consideration and strategic decisions. A significant number of acquisitions have been identified within the energy sector, as many companies are implementing diversity of their energy portfolios and look to buy businesses in the green energy sectors in particular, and also to gain access to advanced energy technologies (the Germen Remondis operating in the waste processing sector purchased SFW Energia, Polish Orlen acquired Energo and Doppler Energie).
In addition, a large bulk of acquisitions were also seen on the medical market where companies were targeted producing medical facilities, laboratories and drugs. The next attractive platform for investors remains investment in entities operating in the new technologies sector, encompassing gaming and computer software companies. For instance, the Chinese tech giant Tencent has acquired a dominant stake in renowned Polish gaming company Techland. The next lucrative segment of acquisitions could be the food industry in Poland. The German food giant LISNER has acquired its competitor, the Polish company GRAL.
Q2 Does economic downturn mean more caution, and therefore fewer acquisitions, or does it mean more businesses in distress, therefore more mergers?
In my opinion the costs of a merger are much lower than the costs of acquisition and this might be highly influential during economic downturn.
A merger usually encompasses three big costs:
- professional fees (attorneys, accountants, consultants, tax advisers) that vary depending on the scale of merger transactions
- tax and finance costs
- integration costs which are associated with the management, product lines, production capacity, brands, people, facilities, customer support, and technologies all have to be aligned and possibly combined and converted. These efforts may not work, or they might cost more than the combined value of the companies, in which case the transaction will fail
Merger means the combination of two corporations, when one absorbs the other. The acquiring corporation continues to exist, but the acquired corporation is dissolved. In times of crisis, mergers can be used to help companies out of distress.
A horizontal merger combines two businesses in the same field or industry that were competitors prior to the merger. This can lead to market expansion of the acquiring company that may be either into new products or into new areas.
A vertical merger brings together two companies, one being the customer of the other. Such a combination usually removes the customer from the market. It may also remove a source of the supply if the acquiring company is a customer of the acquired one.
Finally, a conglomerate merger is one in which the businesses involved are neither competitors nor related as customers or suppliers. Through a well planned merger, a company in distress can survive and stay afloat. However, any merger should also take into account antitrust considerations if a combination of businesses result in unreasonable restraint of trade or if it results in monopolisation of a line of commerce.
Q3 Are acquiring businesses taking into account the ESG credentials of businesses when they assess potential targets for acquisition?
ESG is short for Environmental, Social, and Governance. It’s a collective term for a business’ impact especially on society and the environment. These days ESG credentials are increasingly important when it comes to assessing potential targets for M&A deals on the Polish market.
“ESG credentials are increasingly important when it comes to assessing potential targets.”
Many companies operating in Poland have implemented policies and regulations imposed by EU – laws and the European Commission to meet ESG criteria. On 24 April 2024, the European Parliament adopted the Proposal for a regulation of the European Parliament and of the Council on the transparency and integrity of Environmental, Social and Governance (ESG) rating activities. ESG ratings provide an opinion on a company’s or a financial instrument’s sustainability profile, by assessing its exposure to sustainability risks. ESG considerations play a significant role within M&A evaluations, including how attractive such a business is. There are high-impact industries that pose a high risk for ESG, those are industries such as manufacturing of clothing, manufacturing of textiles, forestry, agriculture, extraction of minerals, mining, and wholesale trade in minerals. In these areas of businesses, buyers will especially look at a potential target to find out if the targeted entity has a weak or rather strong ESG record. Finally, the decision to acquire or not acquire a business may be in these areas very much ESG motivates.
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