12 March 2012 | By Lucy Burton
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As the only EU member country to have avoided recession, Poland is shaking off its old-fashioned image and seeing investors flock in
The clichéd view of Poland used to be that of a poor communist state full of vodkaholics and beetroot. But fast-forward to 2012 and the new truism is a little more flattering – Poland is Europe’s big success story. The only country out of the 27 EU nations to avoid a recession, Poland boasts consistent economic growth and a stock exchange stronger than Vienna’s – striking credentials when set against the backdrop of a European debt crisis. So striking, in fact, that the whole world is watching.
According to the National Bank of Poland, the inflow of foreign direct investment between January and October 2011 amounted to more than €9bn (£7.6bn) – 34 per cent more than in the whole of 2010.
“The past 12 months have seen Poland benefit from the legal sector equivalent of a financial ‘flight to quality’ – investors have flocked here, given the trouble elsewhere in Europe,” says Tomasz Dabrowski, Salans’ office managing partner in Warsaw and head of the firm’s Central and Eastern Europe (CEE) team.
“Direct investment in Poland was up almost 40 per cent in 2011, and all those investors generate significant demand for legal services,” Dabro-wski says. “Add to this a vibrant and active stock exchange welcoming IPOs and a sizeable presence in Poland from major international law firms and you have the recipe for a legal market on the up and up.”
Up and up is a good way of putting it. Rather than just keeping its head above water, Poland has expanded at a dizzying pace. GDP grew by 4.3 per cent in 2011, with Poland’s hosting of the European Football Championship along with Ukraine expected to stimulate the local economy by a further 2.5 per cent this year.
The numbers have attracted big investments to the Polish capital. Last year saw Yingke Law Firm, one of the biggest law firms in China, open its third European office in Warsaw.
“The decision of Yingke to set its foot in Poland coincides with a new chapter in Chinese-Polish relations,” says Attila Tiborcz, foreign legal counsel at Yingke’s Beijing office. “With foreign direct investments and cross-border commercial deals involving Poland and China, we offer guidance on how to turn Poland’s advantages – special economic zones, an educated workforce and huge expertise in traditional industries – into significant Chinese investments.”
The increased confidence works both ways. While Poland is seeing a flush of foreign investment, Polish companies are becoming global players. Just a few weeks ago shareholders of Vancouver’s Quadra Mining approved a $2.87bn (£1.81bn) takeover by Polish mining company KGHM Polska Miedz, the nation’s biggest bid abroad.
The bid, which could make KGHM the world’s largest mining company by 2018, proves that Polish companies are making their presence felt beyond Europe.
The country’s companies are certainly not dragging their feet. On the heels of KGHM’s acquisition, for example, Poland’s largest insurance company PZU announced plans to establish a $4.13bn fund to finance overseas takeovers and set up PZU International.
“Polish businesses are coming to the world stage, which means more work from law firms in Poland and a growth in M&A deals,” says Lejb Fogelman, managing partner at Dewey & LeBoeuf in Warsaw. “We’re seeing multibillion-pound transactions that five years ago were unheard of. Polish companies are getting bigger and bigger and, while we’re not necessarily seeing more deals, we’re seeing bigger ones.”
Dewey’s representation of Spartan Capital Holdings, indirectly controlled by Zygmunt Solorz-Zak, in the £6.6bn acquisition of Polkomtel last year is a case in point. The deal was Europe’s largest leveraged buyout since 2008 and the largest acquisition ever made in Poland.
“If you had said this four years ago people would have laughed at you,” adds Fogelman. “But Polish companies are getting bigger and the economy’s moving too.”
So far, so good. However, a number of lawyers in the Polish capital point to a flipside of the coin. Data from Thomson Reuters proves that deals are getting bigger but the volume of deals is not keeping up. In 2007 there were 349 M&A deals involving a Polish target, collectively valued at $6.9bn, while 2011 saw 344 deals in the same bracket – five fewer than in 2007 – worth $13bn more. With deals getting bigger in value but not volume, smaller firms are left scrabbling for mid-market deals, a scrabble made all the more competitive by a swarm of new entrants.
“It’s the case of same carcass, more to feed,” says Fogelman. “Lots of young Polish lawyers are leaving international law firms, opening boutiques and competing for lower areas of work, with big-ticket deals spread across one or two top firms.”
When asked about changes ahead, many lawyers point to a generational change in the Polish legal market, with younger lawyers either taking on managerial positions or opening boutique firms.
For the former, managing partner of DLA Piper’s Warsaw office Krzystof Wiater points to a shift in management tactics.
“Firms are becoming more creative in developing fee structures, taking on a business model similar to that of consulting firms,” he says. “Lawyers who were the fathers of the market 20 years ago are now retiring or playing secondary roles, which will have a significant impact on the way law firms develop in the next few years.”
Wiater says that since it became easier to join the bar five years ago, Poland’s newly-qualified lawyer headcount has accelerated, suggesting the growing economy could be matched by a growing number of small start-up firms.
“Since the liberalisation of regulations representing admittance to the legal profession five years ago, Poland has seen an increasing number of young lawyers gain qualifications, many who go on to open their own practices,” confirms Wiater.
But moving forward is not all about making changes. Poland, once stereotyped as a backward agricultural country, is in fashion.
“The things that in one period are considered a drawback, in another are considered a great benefit,” says Fogelman. “The country’s ‘backward’ agriculture has worked in its favour – organic, small farms’ healthy Polish food has become a huge commodity.”
While the trend will no doubt boost the economy – agriculture accounts for some 14.8 per cent of Poland’s workforce and 3.8 per cent of GDP – lawyers are hoping the organic craze will continue, allowing them to reap the rewards as more landowner families turn to larger, commercial sales.
“The success of agricultural exports contributes to economic growth and that, in turn, affects every profession that services such growth, lawyers among them,” adds Fogelman. “One person’s problem is another’s opportunity.”
True indeed, but what about Poland’s problems? So far, it seems the proverbial glass is half full, with plenty of opportunities – but even an economic powerhouse will find challenges on the way up.
“People are still mindful that any significant impact in Western Europe will impact Poland,” says CMS Cameron McKenna Warsaw managing partner Andrew Kozlowski. “If banks aren’t lending there will be fewer new projects in Poland, whether infrastructure or M&A, and this will slow the pace of growth for 2012.”
A number of partners voice the same concern, noting that funds from the EU are expected to flow less freely until the eurozone becomes stable. Patient investors may wait for this to happen.
“Due to the tough economic climate and uncertainty surrounding the eurozone, I foresee that this will be a tough year for the market, with many investors waiting for a better economic climate to take transactions from the preparatory stages,” says Wiater.
For now, though, the overall feeling is optimism, with big players on a high from last year’s figures. Salans’ Warsaw office, for example, saw a 30 per cent increase in revenue last year, while DLA Piper saw a 20 per cent rise in fee-earning staff – impressive numbers compared with many of Poland’s deal-starved neighbours.
“Until recently the value of transactions conducted though Poland was too low to attract global players,” says Wiater. “That changed in 2011.”
With one of the last healthy economies in Europe, foreign firms are hoping this trend does not reverse in 2012.
Young guns go for it
Poland’s flourishing economy is providing plenty of work for foreign law firms.
M&A activity is up and so is foreign investment. The boom in activity is also sparking the birth of boutique firms as young entrepreneurial Poles strike out on their own.