The M&A market in the IT sector in Central and Eastern Europe is evolving dynamically, with key trends pointing to increasing activity of regional companies in foreign markets, especially in the United States. Dr Chrystian Poszwinski, Head of CEE at HWF Partners, an experienced advisor in the area of M&A transactions, talks about current developments, challenges and the future of technology investments.
Klaudia Ciesielska, Brandsit: What key trends are you currently observing in the M&A market in the CEE IT sector?
Dr Chrystian Poszwinski, HWF Partners: Changing trend. Back in the covid era, numerous US IT companies were operating in Poland and the region, pursuing their ‘acqui-hire’ policy. Nowadays we see a trend going the other way, i.e. Polish companies, often backed by capital from regional funds, are looking for their ‘targets’ overseas. What is the reason for this? The main reason is the distance of the American customer from using the products or services of companies that do not have a so-called presence in the USA. Another argument is simply the potential development that Polish and regional entrepreneurs see in cooperation with US entities and the opportunities offered by using the US market to sell their products or services. Poland has ceased to be a country with cheap developers and has become a significant player in the IT field. This policy means that investors are increasingly looking to countries such as Romania to ‘outsource’ their services.
“In recent years, the VC market has not ‘let’ many new entrants out from under its wings.”
K.C.: Is the IT M&A market in this region different from the rest of Europe?
Ch.P.: It seems that differences are slowly disappearing. In the context of the aforementioned trends, entities originating from the CEE region are increasingly recognised as global players, hence attracting the interest of foreign investors. If we look at the European market, there are few entities to buy and more and more willing buyers. This is brilliantly illustrated by the entry into the region in recent years of funds that focus exclusively on technology. However, it is increasingly seen that they cannot find a convenient ‘target’ to justify the risk of a Western European investor to invest in our region. What we hear in the market is also the problem of valuation, which is often based solely on intangible components. In recent years, the VC market has not ‘let’ many new players out from under its wings, and the trend is shifting especially in Poland to investments by strategic players, building their portfolios and expanding their services by buying businesses that are compatible with their current operations. Such an investor, however, is more conservative and cautious.
K.C.: What factors most often influence M&A decisions in the technology industry?
Ch.P.: There are several. First and foremost is whether the technology can be scaled, i.e. not just whether the technology itself has potential, but whether it was created with that in mind from the start and the system allows it to scale realistically. Investors are looking more than ever at intellectual property at this point. A project can no longer just innovate using publicly available source code. Investors expect to be able to not only sell the product resulting from the technology in the future, but also to license the technology itself and make the most profit from that. It is also worthwhile if the product can be sold in a B2B model.
K.C.: You have worked on a number of transactions in different sectors. Does M&A in IT have any specific challenges that are not present in other industries?
Ch.P.: Until recently, one could point, for example, to the cyber security aspects that investors saw mainly in the IT sector. Interestingly, this trend is also changing, due to the increasing automation of companies and processes. It is no longer just the technology company that is exposed to a potential cyber attack. Insurers who offer policies to protect buyers in M&A transactions have started to pay attention to cyber security elements for manufacturing companies as well. In contrast, it used to be in the manufacturing industry that we looked for potential risks in the quality of the materials used or the condition of the machinery and equipment used in production. With the development of technology, computer hardware, servers and their security have become an important factor in risk analysis, making due-diligence increasingly required not only for source code, but also for software and hardware. The IT industry is also characterised by its own approach to employee issues – the market is based on a completely different type of contract, which would be unacceptable in other industries.
“We are getting bogged down with bans and regulations instead of creating development-friendly environments.”
K.C.: Can we expect more mergers and acquisitions in the CEE IT start-up segment in the coming years?
Ch.P.: The answer to this question unfortunately depends very much on how the current start-ups perform in the coming years. If you look at IT deals, outside of the recently fashionable area of AI, we only see large deals involving companies with an established history and a sizeable customer base. The startup market has declined a lot in the last 18-24 months, which it is now trying to rebuild, in a way using capital from PFR. The problem, however, is that those funds that are thriving in our market are now mainly looking abroad. Our region, unfortunately, has still not created an environment where there is a lot of room for development. We have ideas, but money is very hard to come by at the moment. What’s more, if the market sees any entity with potential, surprisingly not only VC funds are looking at it, but increasingly PE funds are starting to reach for these smaller companies, for which there is a shortage of mid-sized companies. The number of deals from the IT sector has tended to decrease in recent years, but this does not reflect the appetite of investors at all, but highlights the weaknesses of regional ecosystems.
“European countries aim to ‘push’ Chinese technology, but (…) unfortunately it is often light years ahead of us”.
K.C.: What technologies and innovations are likely to become the main drivers of M&A in IT in the coming decade?
Ch.P.: Investors are less and less interested in technologies that are directed at consumers. To a certain extent, this problem is also due to regulations around consumers, including, for example, in the area of personal data protection and others, which have begun to place a significant burden on entities operating in this area. We are even talking about pan-European regulations rather than strictly Polish ones. Theoretically, the countries of Europe are striving to “push out” Chinese technology, but unfortunately it is often light years ahead of us. We are getting bogged down with bans and regulations instead of creating development-friendly environments. It seems that the technology around small nuclear batteries and quantum computers could be something that revolutionises the market. The technology of today is no longer just a platform on a website, but increasingly robotics just combined with artificial intelligence. The market has also started to recognise that the population is ageing and, as a result, we have more and more sick people. This translates, for example, into interesting investments in the area of state-of-the-art apparatus or chips, which are intended to support either brain function or even to help the blind by mapping the area in which they move. Biometric technology is also gaining in importance. Perhaps the biggest disappointment seems to be virtual reality, which has not attracted as many users as the market originally expected.
“The technology around small nuclear batteries and quantum computers could be something that revolutionises the market.”
K. C.: What advice would you have for IT entrepreneurs who want to prepare their company for a potential sale?
Ch.P.: Don’t assume in advance that everything in the company works, just because your technology works. Investors will be looking at many other areas and it’s a shame to let them downgrade your company just because other areas have been ‘forgotten’. Of course, it is easier said than done, but that is why we encourage you to discuss a potential transaction with your advisers as early as possible and prepare your company for the process.
Dr Chrystian Poszwinski specialises in international business development in Central and Eastern European countries and regional investment promotion. He has a PhD in law and is a practicing legal advisor with 10 years of experience in mergers and acquisitions (M&A) transactions.
On a day-to-day basis, he manages the CEE region at the UK-based advisory firm HWF Partners. He is an expert in transactional insurance (W&I), providing services to private equity funds and local and international corporate clients.
Prior to joining HWF, his domain for almost 8 years was M&A transactions at the international law firm BakerMcKenzie, where he gained experience in foreign offices (Vienna, Zurich) and supporting the Nokia team in Poland from the in-house legal department.
He is the author of scientific publications on the borderline of M&A transactions and personal data protection. He is a regular speaker at numerous panel discussions on transaction-related topics, foreign markets, including in particular the CEE region.
