In late May, a group of investors led by German insurance giant Allianz AG paid €412 million ($545.33 million) for the Silesia City Center, a vast shopping mall and residential complex in the southern Polish city of Katowice. It was Poland's single largest asset sale ever, according to PaweB Debowski, a Warsaw-based attorney who heads the Central Europe real estate practice at Dentons and who advised the sellers, the Austrian property concern Immofinanz.
Various voices hailed the deal for its size and how well it reflects on Poland's property market, which has recovered nicely since the 2008 crisis, especially in the central business districts of major cities.
The transaction is steeped, as well, in symbolic importance. It's a marker of Poland's economic transformation, from the ravages of central planning, pollution and inefficient resource extraction to consumer services. City official Mateusz Skowronski called the center "the most excellent and famous example of the first post-industrial facility in Katowice."
The Silesia City Center occupies the site of the old Kleofas coal mine. The Polish government closed the mine in 1996, after which it underwent almost a decade of technologically advanced remediation, equipment removal and backfill. In 2005, Hungarian property developer TriGranit Holding Ltd. acquired the site and spent €180 million building the center. Architects placed a mineshaft tower on the grounds as a decorative link to the past. After the project was completed, a subsidiary of Immofinanz bought it for an undisclosed price, then spent another €100 million on expansion.
The project broke new ground on many levels. "Even in the late '90s, the concept of building such a site like Silesia in a city like Katowice was a little bit like, 'Really? Are we really going to do it?' " Debowski said. "It was a matter of vision."
Shuttered mines are common in the southwestern Polish region of Silesia, near the borders of both Germany and the Czech Republic. The area is divided into two voivodeships, or provinces, Upper and Lower Silesia, that reflect a redrawing of the European map following World War II. Germany lost Lower Silesia to Poland, which in turn saw some of its eastern territory appropriated by Stalin's Soviet Union.
During communist rule, Silesia became one of the world's largest coal producers, but at enormous cost. The state pushed production regardless of competitiveness and ignored safety and health concerns. Unprofitable coal mining drained coffers. Unregulated mining triggered an ecological nightmare, destroying lives, devastating the environment and contributing to Poland's dubious distinction as the world's most polluted country in the mid-1980s.
With communism gone by the 1990s, most of the mines were closed. Some abandoned sites remain eyesores, with dilapidated brick structures rising above weed-strewn fields.
But others transformed themselves into everything from a technology center to a shopping mecca.
The ability to repurpose, repackage or resurrect coal mines both exemplifies and underscores the challenges of economic change Poland continues to face. The country has successfully transformed itself into a vibrant market economy. Now, it must make the difficult transition to higher technology, more value-added manufacturing and services.
"We have very strong advantages in Poland: an educated and skilled population, a very strong culture of technical education and engineering, a kind of natural capability to improve things. This is something that we can develop more," said Maciej Witucki, president and CEO of Telekomunikacja Polska SA, Poland's largest telecommunications company.
"Today, local capital is quite limited. We haven't built enough wealth local," added Witucki, one of the country's most outspoken businessmen. "The advantages we have is that capital is flowing from the outside."
IN LESS THAN A GENERATION, Poland has undergone a remarkable metamorphosis. Bankrupt in the late 1980s, it successfully threw off the shackles of communism and a planned economy to become one of Europe's consistently best economic performers and a star in what is sometimes referred to as "emerging Europe."
GDP growth has averaged more than 5% annually and the economy expanded even after the global financial meltdown, the only country in the European Union to do so. Prime Minister Donald Tusk famously termed his country "a green island" in a sea of red.
"Poland is a success story," proclaimed Beata Stelmach, the country's undersecretary of state. Stelmach chatted over lunch at an upscale Warsaw restaurant, her comments competing with a recording of Tom Jones' "It's Not Unusual" that seemed to endlessly loop through the sound system.
Many elements factor into this success story: high levels of foreign investments; an entrepreneurial ethos; quick and thorough economic and trade liberalization; a skilled, young and educated workforce; entry into the EU; a strong and stable banking system; and a strict monetary policy.
The key now is to keep moving up the economic food chain. That won't be easy, especially in the short term. Poland this year is projecting minimal GDP growth, caught in the euro-zone malaise and its own problems.
"Poland is no longer an island," said Jacek Gizinski, a Warsaw-based partner with DLA Piper, although he was quick to add, "There's still a lot to do. But we're on a good track."
Poland's ongoing economic success is critical, not only for its own populace but for a larger business and investment community. As the core of the European economy stagnates and its southern rim convulses and contracts, investors look to the periphery. With a population of 40 million, Poland is by far the largest economy in emerging Europe and has become a favored safe harbor for both strategic and financial investment.
Private equity in Poland, for example, has far outstripped other Eastern European markets, although dealflow is definitely slowing. In 2011, 14 PE-led buyouts accounted for over €1 billion worth of deals in Poland, according to London-based research firm Preqin. So far this year, however, deals total just €78 million.
M&A activity is also down this year and 2012 from a 2011 peak, although Jaroslaw Grzesiak, the managing partner of Greenberg Traurig LLP's Warsaw office, expected "the second part of the year to be very bullish."
The biggest deal of the year so far represented the gamut of Polish ownership. In March, Germany's BSH Bosch und Siemens Hausgerate GmbH closed on its 600 million zlotys ($187 million) acquisition of white goods maker Zelmer. European private equity firm Enterprise Investors held a 49% stake in Zelmer, acquired when the company, then state-owned, went private in a 2005 initial public offering.
The Polish economy is now the sixth largest in the EU. Its economic base is increasingly diversified. Coal mines -- or what was left of them -- several times served as a kind of stage backdrop during a recent reporting trip to Poland.
The trip, underwritten in part by the Ministry of Foreign Affairs, was designed to showcase potential investments as well as the policies that support them.
One memorable dinner took place 1,000 feet below ground in what were once pump chambers at the Guido Coal Mine. Located in Zabrze near Katowice, the mine opened in 1855 and was once the deepest in Europe. The mine closed down decades ago. Six years ago, however, the mine reopened to tour groups, with entry through a miners' cage, rides on a miners' train, and demonstrations of coal mining techniques through history, all promoting what the Zabrze government billed as "industrial tourism."
The pump chambers have been transformed into a banquet hall, complete with kitchen and bar. According to guide Gregory Dziwicz, the hall hosts everything from weddings to theatrical performances.
Gimmicky, perhaps, but also necessary, officials argued. "The decision to close coal mines in the '90s created a huge social problem," said Roman SzeBemej, mayor of Walbrzych, a city in Lower Silesia best known for Poland's version of Versailles, the Ksiaz Castle.
In Upper Silesia, some 100 mines operated during the communist era, 12 in Katowice alone. That was down to 35, according to Dziwicz. Unemployment in the region ran at 11.5%, which still beat Poland's 13.2%, but was not that much better than the EU as a whole.
"Other work has made up for the loss of mines, but it's not enough," Zabrze deputy mayor Igor Cieslicki said, between vodka toasts at dinner. Cieslicki added it had been difficult to retrain miners, but that the emphasis was now on the next generation. "We need new jobs for their children."
Zabrze's investment slogan: "A mine of opportunities."
Poland has by no means jettisoned coal completely. It has more coal reserves than any other country in the EU -- 93% of which are located in Upper Silesia, according to the European Association of Coal and Lignite. Upper Silesia continues to employ more than 120,000 in coal mining. Poland still relies more on coal for power than any other EU nation and it's caught between its own resource base and EU pressure to diversify into cleaner energy sources.
The country's largest coal producer is Kompania Weglowa SA, also based in Katowice, but with active mines elsewhere. In late June, Poland's biggest utility, Polska Grupa Energetyczna SA, announced it would tie up with Kompania to underwrite an 11.6 billion zlotys coal-fired power plant expansion. Government-owned Kompania may invest in the project as well as supply coal, PGE said in a statement at the time. PGE is also majority owned by the government.
Efforts to privatize coal mining in the early 1990s met with stiff resistance from well-organized and politically powerful miners' unions. Since then, the record has been checkered, with the government's Treasury Ministry occasionally floating minority stakes through the stock exchange. Perhaps half the still-operational mines have been privatized.
The latest effort came two years ago, when the government offered a 33% stake in coking coal producer Jastrzebska Spolka Weglowa SA on the Warsaw Stock Exchange. With coking coal commanding record prices, the timing was perfect and the 5.37 billion zlotys IPO boosted government coffers nicely. Since then, however, revenue in what is now called the JSW Group has fallen and profits have plummeted. JSW is now trading for half of what it did when it first went public.
The IPO of coal trader Weglokoks SA, expected last year, was put on indefinite hold. The government has listed Kompania Weglowa and another large producer, Katowicki Holding Weglowy, for eventual privatization, but the timing is open-ended.
The Polish coal industry as a whole has struggled on the global mining stage. Kompania Weglowa has lost money this year and is ailing financially. Many other mining companies remain only marginally profitable. Production has continually declined. In recent years, Poland has actually become a net importer of coal.
"This is a failure of the Polish transition," said Anders Aslund, a Swedish economist and senior fellow with the Peterson Institute for International Economics in Washington, who has followed Poland and other Eastern European nations since before the fall of communism.
That kind of blanket condemnation is overly harsh and inaccurate, countered Grzesiak, who has advised on many IPOs, including JSW. "There were many fears that privatization would mean mines closing down. That has happened."
Some mining concerns more than hold their own, he added. He cited the IPO of Bogdanka SA in 2009. "It was a huge success," he insisted. Shares have more than doubled since then and the company successfully fought off a hostile $1.2 billion takeover by Czech New World Resources in 2010.
WHILE KATOWICE is the geographic buckle of Poland's coal belt, this city of 300,000 has become particularly adept at pushing economic transformation. Its unemployment rate stands at a mere 4.5%.
"We are creating a new, urban tissue," said Skowronski, an engaged and urbane 34-year-old, who held the title of "mayor's plenipotentiary for strategic investors" in Katowice. Foreign capital is key, he said, and "the international character of new investments is something we're very proud of."
For a breakfast meeting, Skowronski traipsed to Goldstein Palace, an ornate Neo-Renaissance building from the 1870s that serves as the city's reception hall. He was basking in the recent news that IBM Corp. is setting up a delivery center in Katowice that will generate up to 2,000 jobs, making IBM the city's biggest employer.
IBM will join other global names locating back-office functions in Katowice. The roster is led by consulting and outsourcing concern CapGemini, which employs over 1,400.
PricewaterhouseCoopers LLP was up to almost 500 employees, four years after opening what it terms as an "in-house shared services" operation with 60 new hires in an office building next door to the Silesian mall. In row after row of low-slung cubicles, young Poles tap computers, working in six languages: English, German, Polish, Hungarian, Czech and Slovak.
This kind of activity, not mining or heavy industry, now defines the city's economy, Skowronski maintained. "Today, bigger employers are operating in the business services center," he wrote in a follow-up e-mail. "We want to take the spell away of Katowice as a mining city."
Business services also better describe general foreign investment trends in Poland, believes Rafal Nowakowski, a Warsaw-based managing partner with investment bank Hexagon Capital Advisors. He traces a brief history of investment cycles post-communism: First, largely American capital invested in basic industries as a way to get into the newly opened Polish market. Especially after Poland joined the EU in 2004, it became an efficient entry point into the rest of Europe and European investors dominated.
"Now, I see a fork in the road," he said. "I see more interest from the U.S., but the nature of investments has changed. These are more global in scope. Investors are looking for cost advantages, foreign language capabilities, flexibility in the young."
Witucki, for one, cautioned against what he said he fears is too much optimism about the benefits of business processes outsourcing, which can exit as quickly as it enters. "This is something that travels at the speed where over 24 hours you can move a center from the city of Wroclaw to the city of Kiev," he said.
For the past decade, according to economics professor Lucyna Kornecki, foreign direct investment has trended toward greenfield investments and away from M&A. The size of investments is also heavily tilted in favor of greenfield, she said.
But while the EU crisis put a huge damper on European investment and there is now "limited traffic" in European-originated deals in general, Nowakowski, for one, expected more to come, especially those "acquiring private businesses which need a stronger owner to expand beyond Poland."
This coincides with a period where more and more family-owned businesses in Poland, built after the fall of communism, will pass control from founders to outside investors, Wituski and others said they believed.
On the other side of the ledger, a few Polish companies were beginning to acquire companies outside the country. Most deals have been relatively small. IT services company Asseco Poland, for example, has acquired four businesses since 2010. The biggest was a 51% interest in the Israeli company Formula Systems Ltd., a $145 million deal.
The exception to this trend came last year when the state-controlled copper and silver mining concern KGHM Polska Miedz SA bought the Canadian Quadra FNX Mining Ltd. for $2.84 billion. The deal represented by far the biggest outbound acquisition yet and was highly unusual for a state company whose Treasury Ministry owner is usually far more interested in dividends than investments.
Polish companies have had a tough time gaining a foothold outside the country. This centers in part on problems of brand recognition and management limitations. But it also reflected difficulties in many neighboring countries, especially those to the east.
"There are few synergies," said Aleksander Kacprzyk, managing partner of Warsaw-based private equity fund Resource Partners. "We have found it's better to put a new factory line here than in, say, Romania."
That bulking up of Polish companies is reflected in the country's M&A activity. Poland's biggest-ever leveraged buyout came in 2011, when Spartan Capital Holdings, controlled by Polish billionaire Zygmunt Solorz-Pak, acquired the country's mobile operator Polkomtel SA for more than 18 billion zlotys.
The country's banking industry is not only a model of successful privatization but remained strong throughout the EU's protracted crisis. That couldn't be said of some offshore owners of the banks, including Bank Zachodni WBK, owned by Allied Irish Bank, and the smaller Polbank EFG, owned by Greece's EFG Eurobank Ergasias SA. A subsidiary of Spain's Banco Santander SA paid almost $5 billion for Bank Zachodni, while Austria's Raiffeisen Bank International AG acquired a 70% stake in Polbank for €490 million, both in 2011. A European banker based in Vienna called Santander's acquisition of Zachodni "an amazing deal, fantastic."
Polish Bank Association president Krzysztof Pietraszkiewicz confirmed that discussions were underway for the possible sale of two more banks: Millennium Bank, partially owned by Banco Comercial Português, and Rabobank Poland, a wholly owned subsidiary of the struggling Dutch lender Rabobank Group.
Ask what single activity had sustained the country through the past several years and analysts of Poland's economic scene are likely to mouth the words "German supply chain." As Germany retooled its economy over the past decade, a key element was major manufacturers moving plants offshore. Poland became a favorite destination. It was close by. It was in the EU. It had that highly skilled worker base, but, in the case of auto workers, wages were less than half their German counterparts, according to an IMF study.
"German companies kept Poland growing," Aslund said.
Other European car manufacturers also located in Poland, as did the supply chain that supports the industry. While some foreign investors acquired existing companies during earlier periods of privatization, most of the newer manufacturing-related investments are greenfield. (One exception: Southfield, Mich.-based automotive parts maker Federal-Mogul Corp. acquired its way into Poland when it bought WSK Gorzyce SA in south-central Poland a decade ago.)
In 1998 General Motors Co.'s Opel division opened a large, efficient and profitable assembly plant for its budget Opel Astra brand in Gliwice, a city of 200,000 located about 30 kilometers west of Katowice. Unconfirmed reports state that GM will move its Chevrolet Cruze assembly from South Korea to Gliwice and expand operations.
STILL, WHILE MANUFACTURERS such as GM and Federal-Mogul continue to shift operations to Poland, the process has pretty much played itself out. Fiat Auto Poland SA, for example, has been assembling Fiats in the Silesian region since the 1970s. Late last year, the company announced it would lay off almost 1,500 of the plant's 5,000 workers.
Poland, like other industrialized countries, faces a growing need to retool a manufacturing base to one that relies more on technology and venture-oriented capital. "Poland can no longer be the country of cheaper labor for German or French companies," Grzesiak said.
Opinions about direction and chances of success vary widely. Witucki, for one, said he believed it was unrealistic to expect Poland to develop its own Silicon Valley or its own Apple. "What we can do and we have all the resources to do is to go from assembling seats and airbags for Volkswagen to the engineering and construction of gearboxes for BMW. It's not yet having a Polish BMW, but it's adding value in mechanics, engineering-oriented activities. This will be the next wave."
The Polish landscape features a few, if small, shining examples. Flytronic SP designs and manufactures drone aircraft in a modest, low-slung building located next to the brick Gliwice Academy of Entrepreneurship, the site of -- you guessed it -- a former coal mine. Founded five years ago, the company employs over 60 engineers and has sunk millions of dollars into development costs.
"There's a big change from old technology for heavy industry to high tech," Flytronic director Jaroslaw Zajac said, motioning to the brick building next door. "We own all these technologies. We created all these technologies."
Zajac declined to give revenue figures, beyond saying that the company received one order from the Polish military -- its sole customer so far -- of "a little less than $10 million." One system -- four planes and one ground station -- cost $700,000. The drones looked like oversized model airplanes, only with far fewer parts to assemble.
In 2009, the privately held Polish defense contractor WB Electronics SA acquired a majority stake in Flytronic for an undisclosed price.
Krzysztof Nowacki pretty much bounded into the reception area for his company, Aduma SA. "Welcome to Aduma, the best interactive company in the world," said an unabashed Nowacki, the international business development manager. Aduma designs software that produces interactive images on floors, walls and windows, the kind of displays that can make, say, hopscotch or shadow boxing a marketing bonanza. Aduma conjured up what is claimed to be the world's biggest interactive video wall in a Wroclaw shopping center. Customers now include Samsung, Google, Nike and Orange.
Last year, Aduma's revenue totaled 6.7 million zlotys, more than double 2011 revenue and about 14 times the 2010 total. Profits last year stood at 642,500 zlotys, with Ebitda at 1.1 million zlotys. According to co-founder Maciej Mielcarek, the company has been profitable since the second month it operated.
Mielcarek said he and his two partners own 50% of the company, while outside investors, including local companies, hold the rest. Aduma listed in February 2012 on the Warsaw Stock Exchange's New Connect market, a kind of small-cap exchange for younger companies. As Aduma's business becomes more global, Mielcarek said, more international investors are showing interest, including venture capital.
Aduma is located in the Wroclaw Technology Park. The 26-hectare site in a suburb of Wroclaw, Lower Silesia's biggest city and capital, is 14 years old. One emerging technologies complex now hosts 146 companies, employing 1,300 people. IBM occupies another three buildings, where 3,000 more work.
Most of the companies were startups. The government-owned park offered an incubator-like environment that included fully equipped laboratories with sophisticated equipment available to tenants at subsidized rates.
Michal Kowalczyk founded Nexwell Engineering six years ago in the park. Nexwell makes house alarm and device management systems. Production has doubled this year, he said, with sales now gearing up outside Poland. However, Nexwell employed just 20 people.
Such examples were impressive. But they're not nearly enough to carry the Polish economy forward. Poland has "invested a lot of money, but not in innovation," said Michal Kleiber, a former science and technology minister who heads the Polish Academy of Science in Warsaw. Kleiber blamed various Polish governments, including his own, for underfunding R&D. "We attracted a lot of foreign investment. We forgot to increase research budgets."
Kleiber said he believed this failure dampens economic ambitions. "We have huge aspirations," he said. But optimism has flagged over the past couple years. "There's a feeling we're underperforming."
While Kleiber could be dismissed as just another sniping opposition politician, less-biased individuals shared his concern. "Innovation is something not very strong yet," DLA Piper's Gizinski admitted.
Kleiber's cavernous office is located in the Palace of Culture and Science, Poland's tallest building and an unavoidable reminder in Warsaw of the country's former Soviet masters. "A gift from Uncle Joe," explained several residents, often with disdain. Built in 1955, the building replicated several Moscow buildings that typify Stalinist architecture.
FOR ALL THE TALK of the future, you can't escape the past in Poland. Its history through most of the 19th and 20th centuries was one of dismemberment at the hands of Germans, Austro-Hungarians and Russians. In terms of relative population size, Poland suffered the highest casualty rate of any country during World War II.
Yet, relations between Germany and Poland have long since moved beyond that horrific period. Not so Polish feelings toward Russians, who for centuries exploited Poland as its oppressed vassal to the west. Like others in Eastern Europe, the Poles actively resisted Soviet conquest, and, exemplified by the Solidarity movement of the 1980s, led the way in nonviolent opposition.
The bitterness remains, and Poland has worked hard to align itself with the West. "Poland's Westernism," historian Norman Davies wrote in "Heart of Europe: The Past in Poland's Present," "is fundamental and compulsive."
One symbolic gesture: In 1994, Poland established its first post-Soviet stock exchange in the building that previously served as headquarters for the communist party. The Warsaw Stock Exchange eventually built its own state-of-the-art building. Trading began there in 2001. Some 450 companies now list on the main exchange. Another 400 -- including Aduma -- appear on an alternative exchange that operates much like London's AIM.
In 2010, the exchange itself was privatized, when the government sold a 64% stake in an IPO.Warsaw now hosts by far the region's biggest stock market and has successfully wooed companies from Austria, Czech Republic, Hungary and Ukraine. Its WIG20 index is the fourth largest by volume in Europe. In April, the exchange jettisoned its original trading platform, built on a French model, and installed a new system developed by NYSE Euronext.
The exchange has grown in part because of two separate government initiatives. In 1999, the country ordered mandatory contributions to privately operated pension funds. Those funds can invest up to 50% in equities, but only 5% in stocks outside Poland and none in alternative assets. (A foreign company listed on the Warsaw exchange is treated as a domestic investment.) Assets in 12 authorized Polish pension funds total about 280 billion zlotys.
The second initiative was linked to privatization. Over the past five years, the Treasury Ministry, which controls state-owned enterprises, has used stock market IPOs as the preferred vehicle for divesting.
That doesn't mean that either former state-owned enterprises or Polish pension funds completely carry the exchange, officials quickly pointed out. Last December, for example, fast-growing Alior Bank SA raised 2.1 billion zlotys through an IPO, marking by far Poland's biggest stock listing of a privately held company. According to Lucja Didkowska, in the exchange's investor relations department, about 48% of investors are foreign.
"Poland has by far the best stock exchange [in the region]," Aslund said. "It's been a tremendous success."
In early May, Immofinanz listed on the Warsaw Stock Exchange. The listing was a nod to the importance of both Poland and its capital market and, the company said, an attempt to access Polish investors, specifically the pension funds. The listing came less than three weeks before the Silesia Shopping Center deal was announced.
Contemporary fashion brand Vince Holding Corp. is looking for a new chief financial officer and treasurer as Lisa Klinger has resigned. For other updates launch today's Movers & shakers slideshow.
The Deal's Rhonda Schaffler speaks with Marc Shaffer an M&A transaction advisory partner with Crowe Horwath. Marc discusses Crowe Horwath's new study, Steering Successful Growth: Value Capture in M&A. More video