Time for takeover
By : Anna Kocinska
One of last year's biggest business stories was the merger of global giants, particularly America Online's hookup with Time Warner and JP Morgan's merger with Chase Manhattan. But a series of mergers and acquisitions (M&A) also took place around Central Europe signaling that regional economies are doing whatever it takes to survive.
According to a survey by PricewaterhouseCoopers (PwC), in the first half of 2000 alone the number of M&As in the Czech Republic, Hungary and Poland increased by 53%. Poland witnessed a 151% increase in M&A activity (in the first half of 2000), with 201 deals compared to just 80 during the first half of 1999.
Following international trends, telecom, media and IT were the most active M&A sectors, accounting for almost 30% of all deals. However, as the PwC study shows, most deals, particularly investments in Internet and domestic transactions, tended to be smaller. The average size (excluding only a few deals above $100 million) was $9.1 million in the first half of 2000.
"So the study shows the real bread and butter of what goes on and reflects the predominance of privately owned, medium-sized companies," said Richard Golden, director of financial advice at PwC. "The Polish economy is similar to Germany, obviously at its early stages, where the medium-sized company sector is the driving force behind M&A activities."
Although last year's local headline deal was the merger between Citibank (Poland) and Bank Handlowy, smaller transactions also played their part. According to market observers, these smaller deals are a sign of an ongoing consolidation among domestic companies.
"You have a huge amount of consolidation going on in Poland because if companies are going to attract capital and face foreign competition, they have to reach a certain size," Golden said.
For companies like the Gdynia-based, Polish-owned Telewizja Kablowa Vectra (TK Vectra), a cable TV broadcaster with ambitions to provide Internet and telephony services, consolidation is part of its long-term strategy. "Those who are not investing in the modernization of cable networks are out of the game," said Tomasz Wegrzynski, TK Vectra's founder and CEO. "And modernization will pay off if the network is large enough. That's why consolidation of medium and small networks is a must."
A national network
TK Vectra leads the cable sector in M&As, which have allowed it to set up a cable network throughout the country. Last year, its number of local networks grew from about 20 to more than 40, and now covers small cities in the southwest, northeast and central Poland.
"Every transaction is based on a case-by-case analysis," Wegrzynski said. "Sometimes we suggest purchasing only the cable network as fixed assets, other times we simply take over shares in the company that operates the network. There are no fixed rules on how we do it."
With more than 200,000 subscribers in the first half of 2000, TK Vectra, first established in 1992, is the third-largest cable operator in Poland. The other two big players are UPC Telewizja Kablowa, owned by Amsterdam-based United Pan-Europe Communications, and Aster City Cable, part of the Elektrim group. Like UPC, TK Vectra's goal is to provide three services: access to the Internet, cable TV and telephony, all through the same cable network. Currently, no more than 5% of TK Vectra's subscribers use the Internet. "The (Internet) market is emerging right now, but we want to be part of it already," Wegrzynski said.
He said consolidation helps the company to gain funds for necessary investments by decreasing management costs and enlarging the network. This year TK Vectra will continue to consolidate. "According to my estimates there are still some 30 local operators with 2,000-5,000 sockets each that are interesting to us," Wegrzynski said.
TK Vectra will also have the capital available for further acquisitions as a result of its deal last year with investment funds managed by Bank Rozwoju Eksportu (BRE) Private Equity. The funds acquired 26% of cable.com Vectra (created by TK Vectra), part of the TK Vectra media group, for zl. 130 million ($30 million). "We can also finance them with debts, doubling currently available funds," Wegrzynski said.
With all this financial muscle behind it, industry pundits are predicting that TK Vectra could be a major force in M&A activity this year. "(TK Vectra is) in a perfect position to do so," said Marcin Duszynski, general director of the Polish office of Advent International venture capital fund. "Practically nothing is going on at UPC, so a dynamic Polish company with very good management and good financial results might become a driving force on the market."
As a result of last year's many mergers and acquisitions, Duszynski said the Polish economy has now come of age. He said the era of entrepreneurs who established their companies in the early 1990s is drawing to a close.
A new maturity in business
"We are witnessing the beginning of an era of managers," Duszynski said. "People who started a business and developed it to a certain level have decided to pull out and cash in their money. They're saying let the managers do the work now."
An example of this trend, Duszynski said, is the successful buyout of Roman Kluska, founder of the Nowy Sacz-based Optimus, a leading IT company. "Look at Kluska," he said. "He's left the business at the time when people are beginning to see that mass production of PCs no longer makes sense and at the same time perceived Internet activities as fantastic, still without asking where the money is."
Kluska made his move to withdraw from Optimus last May. He and his wife sold their shares to entrepreneur Zbigniew Jakubas and BRE Bank. The shares were then sold to Luxembourg-based ITI Media Holding, which owns private broadcaster TVN, in November. ITI's plans involve separating Optimus from its Internet activities to concentrate on its onet.pl. portal.
Kluska got his start in business 13 years ago as a raspberry salesman. In 1988 he established Optimus with an initial capital of zl. 150,000 (old zloty). Last year he was ranked the 16th richest Pole.
According to Duszynski, the Polish economy's initial phase included entrepreneurs starting up a business in the right place at the right time and making money. The second phase saw businesses become more competitive. The third phase, he said, has just arrived. "It's no longer enough to simply be an entrepreneur," he said. "To take your company to the next level you need a group of skilled managers and you have to coordinate their work.
"Foreign companies (in M&A activities) also caused that revolution. When they send managers to Poland, you need your manager to be able to compete with them."
But Wegrzynski said TK Vectra is not yet ready for a strategic partner. "I don't think that in the near future the company would benefit from a merger. Its development is based on the financing provided by the transaction with BRE," he said. "Obviously, I don't know what will happen on the telecom market in a few years. We might join some capital group, but right now we are effectively introducing the triple-play services on our own."
Other industry analysts said strategic investors are needed to make smaller companies more viable for future mergers. Duszynski said companies such as TK Vectra need professional assistance before they're ready for a takeover. "Before that moment of concluding a transaction with a significantly bigger strategic partner comes cooperation with us," Duszynski said. "We are looking for a company that may become an attractive partner in a merger or an acquisition deal."
He said an injection of capital helps companies overcome all kinds of barriers "such as the one-man-show syndrome. This affects many founders of companies who try to control everything, even if their growing company makes it impossible."
Foreign analysts said Poles do not make good team players and perform better on their own. "(Team playing) is not a natural inclination for Poles," PwC's Golden said. "Poles are great entrepreneurs but on their own. They get to a certain size when working together becomes difficult. And to catch up with Europe this has to be overcome."
A team effort, however, is not a problem for TK Vectra's Wegrzynski. "It's obvious that when a company develops, its management grows too and some responsibilities have to be delegated to other people," he said. "Every owner of domestic companies needs to assess his capabilities and at a certain stage find partners who will co-run the business. But you should never ignore the owner's experience. That would be a terrible waste."
Wegrzynski said TK Vectra invites most of its founders to cooperate when taking over other operators. "I am surprised by revolutions that go on in other companies that have been taken over," he said. "Foreign strategic investors often put an end to the independent development of a domestic company, depriving it of its character. On the other hand, I think that efforts made by foreign investors to improve the quality of Polish management are valuable. It's good to combine Western management style with typical Polish easiness to act in changing conditions."
Cross-border mergers
But above all it's vital for Polish companies to get involved with M&As so they can tap into foreign capital, Golden said. "You can't exclude yourself from competition for capital, not only with the Czech Republic and Hungary, but also with Greece, Spain, Portugal, and other players," he said, adding that a company with lower costs will always have an advantage over others. "And that's why Polish banks became part of foreign banking groups, which are now becoming bigger because they are getting more efficient access to capital."
Last year, the management board of Bank Handlowy signed a deal to merge with Citibank (Poland), which is expected to be completed on Feb. 1. The merger is in the form of a transfer of the overall property of Citibank (Poland) to Bank Handlowy in exchange for shares. These will be handed to the shareholders of Citibank (Poland) by Handlowy and Citibank's shareholders will obtain 1,350 of the new shares of Handlowy for each share they own in Citibank (Poland). Citigroup's intention is to hold not more than 75% of Handlowy shares in the long run. Meanwhile, Handlowy will remain a quoted company.
"In the times of growing globalization and increasing competitiveness, Handlowy's winning of a world-class strategic partner investor Citigroup, the biggest global financial institution creates a solid basis for further development of our bank," wrote Cezary Stypulkowski, president of Handlowy's management board, in a letter to shareholders.
"In terms of retail banking and also corporate banking, a new kind of quality is going to appear on the Polish market. Handlowy has never been a retail bank and Citibank is, by nature, so we can expect new things after that merger," Duszynski said. "PKO BP and Pekao will have competition now, but if they keep changing at the pace they are, they will be late."
Handlowy and Citibank will also have to change to be able to work together under a different structure. And cross-border mergers tend to cause clashes, often cultural, that might be painful, especially for the domestic partner. Companies acquiring other firms need a plan for the post-acquisition phases, M&A experts said.
"First, identify people you can send over, those who really want to come and don't think it's some form of punishment," PwC's Golden said. "Basically, people who have demonstrated an ability to adopt readily to an international environment so they don't complain if they can't find their brand of mayonnaise."
He said Scandinavian companies have often been the most successful foreign companies in Poland because they have a more long-term view. "Americans expect a certain standard of business behavior, they are less patient at this point, and they are more ready to say, 'well if it doesn't work we'll go elsewhere,'" Golden said.
The second stage in planing a cross-border merger is finding a Polish team. "Poles have proved very adept at working for multinationals, especially young Poles," he said. "For them it's a great training ground." He added that learning the local language is also an asset. "It's about learning local mentality and also learning to respect it. And to gain a certain appreciation for the country," he said. "But there is one other element that you have to understand. The biggest aspect you bring is the bridge between what's here and what's back there."
According to Advent's Duszynski, the times when Western companies would send their second or third set of managers to Warsaw has already passed. "And we have a large group of our own highly qualified managers these days," Duszynski said. "On the other hand, those foreign managers who 10 years ago were sent here as if it was a form of exile would now often say that the best part of their career happened in Poland."
