Andrzej Zyguła, PhD Cracow University of Economics, Poland Mergers and acquisitions in Poland in the context of Central and Eastern Europe between 2002 and 2006 trends and perspectives Book of papers from 9 th International Scientific Conference, INTEGRATION PROCESS AND ITS IMPACT ON PUBLIC AND CORPORATE FINANCE, Ekonomická Univerzita v Bratislave 13. December 2007, Vydavatel stvo EKONÓM 2008, s. 515-522 ABSTRACT Mergers and acquisitions in particular involve complex investment and financial decisions in order to promote a company s competitiveness, increase its market share and maximise its capitalisation. Over the past few years, we have observed a worldwide increase in the number of corporate mergers and acquisitions on a local and international scale. The purpose of this article is to study the implications of this phenomenon and to analyse the process of corporate mergers and acquisitions in Poland and in some Central and Eastern European countries between 2002 and 2006. In the article attention was paid to the fact that improving macroeconomic parameters such as low inflation, receding unemployment as well as the increase of GDP will be crucial factors to influence the activity on the M&A market in Central and Eastern Europe. 1
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Mergers and acquisitions in Poland in the context of Central and Eastern Europe between 2002 and 2006 trends and perspectives Andrzej Zyguła, PhD Cracow University of Economics, Poland Introduction The process of economic mutation that has taken place during the past few years in Central and Eastern Europe has posed a number of problems to economic agents as they face the new challenges of the market economy. A new situation, both internal and external forces companies to break away with traditional economic models, formulated in the previous centrally-administered system. Companies find themselves in a new situation, with opportunities and challenges not seen so far. As a result, certain changes in business behaviour can be observed. Companies tend to build up economic bonds through external growth by forming holding companies as well as financial, productive and commercial groups. As a result, mergers between companies are more and more frequent. Mergers and acquisitions in particular involve complex investment and financial decisions in order to promote a company s competitiveness, increase its market share and maximise its capitalisation. Over the past few years, we have observed a worldwide increase in the number of corporate mergers and acquisitions on a local and international scale. The purpose of this article is to study the implications 3
of this phenomenon and to analyse the process of corporate mergers and acquisitions in Poland and in some Central and Eastern European countries between 2002 and 2006. Mergers in the context of the business theory A merger occurs when two (or more) previously autonomous business entities unite to form a new corporation. This usually happens in two ways: - Either, as a result of the merger, a completely new business entity appears. In this case we have A+B=C. This type of transaction is described in the economic literature as a consolidation 1 ; - Or, (and this is the most common situation in practice) two (or more) companies merge into one entity but one of them retains its brand name and its legal statute, in which case we have A+B=A where A is the buyer and B is the seller. This is referred to as a statutory merger 2. An acquisition 3 refers to a company taking over another one by acquiring a majority of its shares so as to control its management. Therefore, an acquisition differs from a merger insofar as the company that is being taken over retains its legal existence. In practice, it is often difficult to establish a clear difference between a merger and an acquisition especially depending on whether the transaction is the result of a free decision by both parties or whether one party is forcing the other. 1 P.A. Gaughan, Mergers, Acquisitions, and Corporate Restructurings, John Wiley & Sons 1999, p.7. 2 Ibidem. 3 W. Frąckowiak (ed.), Fuzje i przejęcia przedsiębiorstw, PWE, Warszawa 1998, p.8. 4
When it comes to mergers and acquisitions, the most common transactions lead to a change of control over a company. It is not uncommon, at first, for an acquisition to occur, which then leads to deeper integration and then on to a full-scale merger. Therefore, the distinction between a merger and an acquisition is often not very clear. Mergers and Acquisitions in Poland Before 1990, in Socialist Poland, only mergers ever took place and were decided by the centralised system, not by the forces of the open market economy. The process of political transformation of the system since 1990 has fundamentally changed the mechanisms of the Polish economy. One of the major components of this mechanism is the capital market. The formation of this market, and within its framework the reactivation of the stock exchange in Warsaw, has contributed to the apparition of modern mergers and acquisitions in Poland. In the beginning, the main actor on this market was the Treasury as they were overseeing the privatisation process. At first, the principal type of transaction was so called privatisations involving foreign investors, who wanted to get a foothold in the Polish market, and the Treasury. Progressively, besides the Treasury and foreign investors, individual, branch and financial investors started to participate actively in the mergers and acquisitions. By 1995, transactions which were typical of the highly developed financial markets such as mergers and acquisitions of incorporated publicly listed companies also emerged on the Polish market. From 1997, 5
mergers and acquisitions in Poland experienced a dynamic growth between 30-60% per annum in terms of the number of transactions 4. Between 2002 and 2006, M&A were still rising, albeit not as dynamically as before (15% on average when it comes to a number of transactions recorded). However, a higher increase of 26% per annum was noted in terms of the value of those transactions. During that particular period in Poland, 1516 M&A transactions were recorded. Their total value was an estimated $31bn (Graph 1) This accounted for respectively 19% and 9% of the markets of Central and Eastern Europe. Bearing in mind that on average 300 transactions per year took place, it is safe to say that M&A were then a daily occurrence. Graph 1. Mergers and Acquisitions in Poland 2002-2006. 450 400 350 300 250 200 150 100 50 0 number of transactions market size [USD million] 398 322 293 259 244 10,9 7,8 6,2 3,1 2,9 2002 2003 2004 2005 2006 18,0 16,0 14,0 12,0 10,0 8,0 6,0 4,0 2,0 0,0 Source: PricewaterhouseCoopers (2003), Badanie dotyczące transakcji kapitałowych w Europie Środkowej i Wschodniej 2002, Różne Ścieżki rozwoju, Raport krajowy: Polska, p.1; PricewaterhouseCoopers (2004), Badania dotyczące transakcji kapitałowych w Europie Środkowej i Wschodniej 2003. Raport krajowy: Polska, p.1; PricewaterhouseCoopers (2005), Badanie fuzji i przejęć w 2004 roku, Raport krajowy: Polska, p.1; PricewaterhouseCoopers (2006), Badanie fuzji i przejęć w Europie Środkowo-Wschodniej, w Rosji i na Ukrainie w 2005 roku, Raport krajowy: Polska, p.1; PricewaterhouseCoopers (2007), Badanie fuzji i przejęć w 2006 roku, Raport krajowy: Polska, p.1. 4 PricewaterhouseCoopers (2001), Central European Mergers & Acquisitions Survey 2000, Czech Republic, Hungary and Poland, p.3. 6
Mergers & Acquisitions in Central and Eastern Europe Between 2002 and 2003, the general climate of uncertainty that arose in the wake of September 11, with the global threat of terrorism, the preparations to the war and later the war in Iraq, fear of SARS, the generally-adverse economic climate, slowed down Mergers &Acquisitions worldwide. Graph 2. Mergers and acquisitions in Central and Eastern Europe 2002-2006 3000 2500 2000 1500 1000 500 number of transactions market size [USD billion] 1070 1176 1235 51,0 38,6 17,7 1848 91,2 2527 163,0 250,0 200,0 150,0 100,0 50,0 0 2002 2003 2004 2005 2006 0,0 Source: PricewaterhouseCoopers (2003), Central & Eastern European Mergers & Acquisitions Survey 2002, Diverse developments, p.2; PricewaterhouseCoopers (2004), Central & Eastern European Mergers & Acquisitions Survey 2003, p.5; PricewaterhouseCoopers (2005), Central & Eastern European Mergers & Acquisitions Survey 2004, A further step upwards, p.4; PricewaterhouseCoopers (2006), CEE/CIS Mergers and Acquisitions Survey 2005, Escalating deals, p.3; PricewaterhouseCoopers (2007), CEE M&A Survey 2006, Maturity, momentum and mega-deals, Central & Eastern Europe, p. 4. In the face of such an unfavourable global climate, the results from central and Eastern Europe remained relatively positive. The main factor that contributed to the development of M&A in the region was the upcoming EU enlargement. Between 2002 and 2003, the number of transactions in this market was still rising by about 19% per annum. In 7
Poland Bulgaria Croatia Czech Republic Hungary Romania Slovakia Slovenia Ukraine Serbia terms of value, transactions increased from $17.7bn in 2002 to $38.6bn in 2003. M&A in Central and Eastern Europe are illustrated in Graph 2. From 2004, the recession on the global M&A market stopped. A favourable economic climate, together with improved expectations for the years ahead, as well as a growth of liquidity of buyers resulted in an increase in corporate activity in the field of Mergers & Acquisitions worldwide. Graph 3. Number of Transactions by Countries in 2002-2006 450 400 2002 2003 2004 2005 2006 1200 350 300 250 1000 800 200 150 100 50 600 400 200 0 0 Russia Source: PricewaterhouseCoopers (2003), Central & Eastern European..., op.cit., p.3-4; PricewaterhouseCoopers (2004), Central & Eastern European..., op.cit., p.6; PricewaterhouseCoopers (2005), Central & Eastern European..., op.cit., p.5-6; PricewaterhouseCoopers (2006), CEE/CIS Mergers..., op.cit., p.4-5; PricewaterhouseCoopers (2007), CEE M&A..., op.cit., p.6-7. Those favourable global trends also had a positive influence on Central and Eastern Europe. However, among other important factors, 8
Poland Bulgaria Croatia Czech Republic Hungary Romania Slovakia Slovenia Ukraine Serbia Russia economic growth in Russia and the EU enlargement were instrumental in stimulating the upward trend in the field of A&M in the region. Between 2004 and 2006 the number of A&M was rising on average by 31% per year and by 63% per year in value. The Mergers & Acquisitions market was characterized by an uneven distribution between individual countries. Between 2002 and 2006, mergers & acquisitions in Central and Eastern Europe are illustrated in Graphs 3 and 4 in both volume and value terms. Graph 4. Market Value by Countries in 2002-2006 (USD million) 12,0 2002 2003 2004 2005 2006 120 10,0 100 8,0 80 6,0 60 4,0 40 2,0 20 0,0 0 Source: PricewaterhouseCoopers (2003), Central & Eastern European..., op.cit., p.3-4; PricewaterhouseCoopers (2004), Central & Eastern European..., op.cit., p.6; PricewaterhouseCoopers (2005), Central & Eastern European..., op.cit., p.5-6; PricewaterhouseCoopers (2006), CEE/CIS Mergers..., op.cit., p.4-5; PricewaterhouseCoopers (2007), CEE M&A..., op.cit., p.6-7. As the above charts show, four countries (Russia, The Czech Republic, Poland and Hungary) led the way in terms of M&A activity in Central and Eastern Europe. Between 2002 and 2006, these countries 9
accounted for 81% of all transactions recorded in the region and for 87% in value terms. Russia, however, was the most attractive market in the region and the undisputed leader. Between 2002 and 2006 this market was rising dynamically by on average 40% in volume and by 65% in value terms yearly. The Russian M&A market is the largest among all Central and Eastern Europe countries. In 2002, 27% of all transactions made in Central and Eastern Europe took place in Russia. During subsequent years, Russia s importance rose systematically, reaching 48% in 2006. In terms of value, the position of Russia is even stronger. Her share of the transactions taking place in the region in relation to the total value of transactions in 2002 was 48% and over the next 5 years, it increased up to 68% in 2006. Of the remaining three countries, Poland comes first in terms of the number of M&A with 1516 transactions of this type between 2002 and 2006 while the Czech Republic and Hungary recorded 988 and 806 respectively. In terms of the value of M&A, Poland takes the second place, with transactions valued at about $31bn, after the Czech Republic where transactions made were worth $36bn. In Hungary, the figure comes at around $22bn. Even together, these countries cannot compete with Russia. Their share was decreasing from year to year. In 2002, transactions recorded in these three countries accounted for 55% out of all transactions. Over the next five years, their share steadily decreased to 33% in 2006. It was similar in value terms as their share decreased to 20% in 2006 down from 41% in 2002. 10
Summary The main factors that stimulated the Mergers and Acquisitions market in Central and Eastern Europe between 2002 and 2006 were EU enlargement in May 2004 as well as the high economic growth in Russia. Nowadays, improving macroeconomic parameters such as low inflation, receding unemployment as well as the increase of GDP will be crucial factors to influence the activity on the M&A market in Central and Eastern Europe. Moreover, according to polls carried out among senior executives from Czech, Hungarian, Polish, Slovakian and Slovenian companies by MergerMarket in 2007, as much as 72% of executives surveyed expect further growth in terms of the number of M&A transactions in the coming 12 months 5. Moreover, 53% of respondents claimed that among countries where an intensification of M&A activity is expected, Romania comes first, with Bulgaria just after her (51%), Poland in the third place (42%), then the Czech Republic (31%) and in fifth place was Hungary. References: Gaughan P.A., Mergers, Acquisitions, and Corporate Restructurings, John Wiley & Sons 1999, Frąckowiak W. (ed.), Fuzje i przejęcia przedsiębiorstw, PWE, Warszawa 1998, 5 MergerMarket (2007), The Central & Eastern European Corporate Strategy Survey; A study of M&A sentiment in Czech Republic, Hungary, Poland, Slovak Republic and Slovenia, p. 9. 11
PricewaterhouseCoopers (2007), CEE M&A Survey 2006, Maturity, momentum and mega-deals, Central & Eastern Europe, PricewaterhouseCoopers (2007), Badanie fuzji i przejęć w 2006 roku, Raport krajowy: Polska MergerMarket (2007), The Central & Eastern European Corporate Strategy Survey; A study of M&A sentiment in Czech Republic, Hungary, Poland, Slovak Republic and Slovenia, PricewaterhouseCoopers (2006), CEE/CIS Mergers and Acquisitions Survey 2005, Escalating deals, PricewaterhouseCoopers (2006), Badanie fuzji i przejęć w Europie Środkowo-Wschodniej, w Rosji i na Ukrainie w 2005 roku, Raport krajowy: Polska, PricewaterhouseCoopers (2005), Central & Eastern European Mergers & Acquisitions Survey 2004, A further step upwards, PricewaterhouseCoopers (2005), Badanie fuzji i przejęć w 2004 roku, Raport krajowy: Polska, PricewaterhouseCoopers (2004), Central & Eastern European Mergers & Acquisitions Survey 2003, PricewaterhouseCoopers (2004), Badania dotyczące transakcji kapitałowych w Europie Środkowej i Wschodniej 2003. Raport krajowy: Polska, PricewaterhouseCoopers (2003), Central & Eastern European Mergers & Acquisitions Survey 2002, Diverse developments, PricewaterhouseCoopers (2003), Badanie dotyczące transakcji kapitałowych w Europie Środkowej i Wschodniej 2002, Różne Ścieżki rozwoju, Raport krajowy: Polska, 12
PricewaterhouseCoopers (2001), Central European Mergers & Acquisitions Survey 2000, Czech Republic, Hungary and Poland, 13