Adam Roguski (AR): At PwC, you are a partner and Deals Platform Leader – how does your community operate?
Rafał Dróbka (RD): The name of the position corresponds to the deal cycle. As advisors, we strive to tailor how we work, and with whom, to best suit the client’s expectations. This will be simplest to explain if we look at the deal cycle, which consists of three phases. The first is the origination and value identification, when one party wants to sell something, another to acquire something. At this stage, we help the sellers consider what the value of the business for sale is, and what needs to be done before taking it to market. We help potential buyers identify what interesting acquisition prospects there are on the market.
The second phase, the more spectacular one that gathers media interest and generates market excitement, is the stage of transaction execution. This is the time of negotiating, doing due diligence, and signing a deal. Here, too, sellers and buyers can count on our support.
The third and last phase, which is not so obvious but might actually be the most important, involves what the buyer actually does with the acquired business. Does the buyer change the strategy, and if so how? Is it thinking about how it wants to exit the investment, and in what timeframe? We help answer such questions. We have a 150-member team working on this.
AR: Do you deal with the Polish market, or work more broadly?
RD: We of course concentrate on the Polish market, as it’s the largest in Central and Eastern Europe. We also work for Polish clients who are planning transactions elsewhere, even in very distant countries, such as South America.
AR: Your latest report on creating value in M&A transactions mainly concerns private equity funds, but this is not the only group of investors you work with?
RD: They are definitely an important share of our clientele, because PE funds thrive from acquisitions. We also work with corporations, for which acquisitions are a way to boost their scale, range, or scope of competences. Moreover, we work with individual investors – from the list of wealthiest people in Poland.
AR: We are operating in times of cheap money – you write that around the world, PE funds hold 2.5 trillion USD in dry powder. Once leverage is factored in, the investment potential is therefore huge. What does the M&A market look like in Poland?
RD: The market is quite stable, there’s no astounding trend of growth, but we also cannot say that the market is drying up. We are seeing stabilization both in terms of the number of deals and their value. The average value of transactions is distinctively lower of the Polish market, as compared to the largest ones. The maturity of acquired assets is also slightly lower on average.
Be it in Poland or in more mature markets, it is evident that the simple ways of boosting companies’ value no longer suffice.
AR: How might an economic slowdown affect the market?
RD: The economic climate can influence the market in a variety of ways. On the one hand, a slowdown may curb the enthusiasm for acquisitions, especially at high prices, but on the other hand it could make some business owners realize that this is the moment when their ideas for developing the business are drawing to an end, so they should exit the investment. There is no obvious rule that a slowdown necessarily entails fewer deals.
AR: When the executive boards of listed companies say that their priority is to create value for shareholders, this is frequently interpreted as idle talk, a catchphrase used when managers are unable to say anything concrete. Your report indicates that value creation is nevertheless something crucial…
RD: Why are deals done in the first place? In order to make money – the more, the better. If something is worth 100 today, say, but in five years’ time is meant to be worth 300, one has to ask what needs to happen, what elements are necessary, to bring that objective of reaching 300 to fruition.
AR: What are the simple ways PE funds used to use to increase the value of companies, but which no longer suffice?
RD: The classic reserve were cost synergies. Funds are institutions specialized in critically evaluating what they buy. Such investors look at the structure of an organization’s costs in terms of reducing them, which translates into greater profitability and growth in the company’s value right from the start.
But everyone knows that now, and existing owners or sellers already cope well with this. And so the reserve for value-boosting through cost synergies is already limited.
On the other hand, there are more difficult fields that can yield significantly more value.
AR: Such as?
RD: Increasing profitability by revenue enhancement. This is of course significantly more difficult conceptually than cutting costs, which is why it was not often applied in the past. This involves thinking about whether the strategy of positioning the product on the market is appropriate, whether future sales channels are being harnessed, whether sales can expand beyond the local market to attain better margins. This can produce a great increase in value.
Another, less obvious aspect that enables value to be retained or increased is human capital. This means not just taking care of the management board, motivating them to develop the company and thereby increase its value, but also taking care of the employees. If we consider demographic factors and the labor market today, retaining talents is one of the fiercest battles.
Our report indicates that if a certain deal failed to drive value, it always involved a failure to motivate and properly develop employees, or a failure to prepare for cultural differences in how people function in the company before its acquisition and afterwards.
AR: In the report you mention two more elements of creating value: the strategic plan for entering the investment, and then exit plan. How do the PE funds most often exit their investments, and is the stock exchange a good scenario?
RD: There are many methods, most often finding a strategic investor that wants to operate the business long-term, merging it with its own business. The second option is selling it to another fund, which intuitively seems not to make that much sense, but funds have very diverse strategies – when one no longer perceives any potential for a company’s development, that does not mean another may not see opportunities for further growth in value.
As far as the Warsaw stock exchange is concerned, it is one of the options – though recently it has not been applied that often, probably because of a shallow market. It is also a more difficult option from the regulatory standpoint.
Interview by Adam Roguski, a journalist for Parkiet.
Interview with Rafał Dróbka, PwC Partner, Deals Platform Leader for #PROSTOzPARKIETU