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Due diligence paints mixed economic picture

Despite the fact that due diligence carried out in the corporate and banking sectors in Slovakia has increased considerably over the last year, only about half of the potential investors asking for the checks go further and decide to invest.
The lesson to be drawn, auditors say, is that while interest in investing here is rising, the maturity of the corporate sector has not kept pace. The unclear workings of many Slovak companies - a lack of 'transparency' that limits the future viability and profitability of a firm - are discouraging many investors from following through on their initial intentions to buy into a company.

Despite the fact that due diligence carried out in the corporate and banking sectors in Slovakia has increased considerably over the last year, only about half of the potential investors asking for the checks go further and decide to invest.

The lesson to be drawn, auditors say, is that while interest in investing here is rising, the maturity of the corporate sector has not kept pace. The unclear workings of many Slovak companies - a lack of 'transparency' that limits the future viability and profitability of a firm - are discouraging many investors from following through on their initial intentions to buy into a company.

Largely viewed as one of the most crucial influences on a final decision made by an investor about a purchase, due diligence is a critical, all-embracing look at a company nd the potential of an investment. It is a process often carried out by reknowned auditing firms in cooperation with investors, and checks the financial, legal and tax status of companies targeted for acquisition.

Santiago Pardo, a partner with the Arthur Andersen auditing firm, explained that a common problem investors and auditors have faced in Slovak companies is a tendency on the part of managements not to include all figures in their books.

"I'm talking now mainly about investments a company has made, provisions for loans, some receivables and loans to other companies that weren't declared. However, this has improved over the last two years, and the trend is now more than a positive one," Pardo said.

Pardo added that this had been compounded by another real and persisting problem: that many companies are undercapitalised, have problems with assets and have receivables which cannot be collected and assets that cannot be sold.

"If you are trying to sell a black hole, you shouldn't be surprised that nobody is interested in buying it," Pardo said. "I think that often, Slovaks are trying to sell companies that at the end of the day foreign investors discover are not attractive. That's the reason why a quite considerable number of due diligence processes result in the investor's withdrawal".

A positive change

Despite Pardo's words, the situation in many companies, auditing firms say, has improved, with more and more foreign investors contemplating moves into central Europe looking towards Slovakia.

According to Kenneth Ryan, senior manager for financial advisory services at KPMG, there has been a marked increase in the number of requests for due diligence as a result of improvements in Slovakia's economic and political climate.

"This [the increased demand for the service] has something to do with Slovakia's recently acquired membership in the OECD and its openly declared effort to join the European Union and NATO. But the fact is also that more investors are coming to Slovakia as markets have become more saturated in neighbouring Poland, Hungary and the Czech Republic," said Ryan.

Recent examples of due diligence in big companies which ended with a successful acquisition include American firm US Steel's scrutiny of the eastern Slovak steel-maker VSŽ, Deustche Telekom's study of recently acquired Slovenské telekomunikácie, and Austrian company Neusiedler AG's sifting of the central Slovak paper producer SCP Ružomberok. Due diligence is also being carried out at the biggest state-owned bank, Slovenská sporiteľňa (SLSP), prior to its planned sale early next year.

Gunter Hassler, executive director for Neusiedler AG and the person responsible for SCP Ružomberok's business development, said that although his company had a very good basic knowledge of the firm they wanted to acquire, they were looking to use the advanced audit process as some kind of supporting picture - exactly the results the due diligence provided them with.

"The due diligence at SCP helped us to understand the company better by allowing a professional team of lawyers, auditors and our own managers to have a deep look at it, to cross-check information that we already had as well as to learn some more details about SCP," Hassler said.

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