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10 Questions

with Michael Mullen
10 Questions | Search restaurants | Archives

July 23rd, 2008 issue

VLADIMÍR WEISS/THE PRAGUE POST
Mullen says the region around Ostrava, as well as Liberec and Chomutov, will attract foreign investors.
The Mullen File



Job title: Partner, Havel & Holásek
Age: 41
Nationality: American
Previous position: Lawyer with
Altheimer & Gray in Chicago, Istanbul, Bucharest and Prague
Education: BA, Grinnell College '89; Charles University 1990-93, 1995-96; JD, University of Iowa '96

Between the strengthening crown, ongoing tax reforms and increasing market saturation, the local business environment is steering foreign investments in new directions. After more than a decade of growth, midsize businesses mull mergers with large corporations, and real estate developers turn toward smaller, regional capitals as greenfields in Brno and Prague disappear. An expert on the complexities of foreign investment, Michael Mullen of Havel & Holásek law firm talks to The Prague Post about regional investment opportunities, the growing rate of mergers and acquisitions, and the Czech Republic’s developing legal environment.
? Havel & Holásek has operated in the Czech Republic since 2001. What experiences has the firm acquired over the years?
With over 60 lawyers, three offices (in Prague, Ostrava and Bratislava) and 500 regular clients, we serve all industries. We have represented more than 40 of the Fortune 500 companies and over 20 of the top 100 Czech companies.
? How have the types of foreign investments flowing into the country and the liquidity of local midmarket businesses evolved over the years?
With the establishment of investment incentives and the end of the wave of large privatizations, most investments flowing into the Czech Republic since 2001 changed to greenfield investments in the manufacturing and assembly sectors. Hyundai’s decision to build its new factory near Ostrava, opened the door for Korean and other Asian investors. With the disruptions at CzechInvest in the last few years and restructuring of investment incentives (along with entry into the European Union), we have also seen more midmarket mergers and acquisitions [M&A] activity — essentially either strategic buyers or private equity groups purchasing companies that were privatized in the 1990s by Czech managers.
? How has the growth of local companies affected mergers and acquisitions by foreign investors?
There has been a significant increase in the pace, sophistication and size of transactions in M&A activities, especially midmarket M&A. Our firm has averaged between 50 to 60 M&A transactions per year in the last three years. We don’t see any problems with liquidity in the short term, because both supply and demand remain relatively high.
? What fields are now luring foreign investment?
More investors have come to the Czech Republic to invest into all sectors of real estate — industrial zones, office buildings, shopping centers and residential projects. In some sectors, however, supply is beginning to exceed demand, which — at least — may result in a stagnation of prices.  Consequently, the liquidity of the real estate market will probably decrease in the short term.
 
? What potential do foreign investors see in local midmarket companies?
There is an opportunity for companies that were privatized by managers in the early 1990s to reorganize and add managerial and market know-how to expand market scope into areas beyond the Czech Republic. Domestically, many local companies have very high market shares that may provide an immediate presence and distribution channels for acquirers. Foreign investors typically buy the companies that were born in the early 1990s to obtain Central European coverage. This is especially true for EU-wide companies that do not yet have a strong CEE presence.
 
? From a legal/political standpoint, how does the business environment in the Czech Republic compare with that of other post-communist EU countries?
The Czech Republic is generally perceived as having a several-year advantage in development over most of other countries in the region. That said, the public markets in Poland, for example, are much more developed than here — the Warsaw Stock Exchange is a real leader in the region. In many areas, particularly tax reforms and other legislative reforms such as bankruptcy legislation, Slovakia has been ahead of the Czech Republic.
? Outside of Prague, what regions currently attract foreign investors?
The Ostrava region is doing very well at attracting investors generally, as is the area around Brno. By comparison, [less-populated] areas such as Zlín, Most and České Budějovice are not doing as well. I expect that to change, however, as transport infrastructure is further developed.
? With the greenfields near major cities like Brno, Plzeň and Prague saturated, where in the Czech Republic will industrial developers go next?
In addition to the Ostrava region, I expect the regions around Liberec, Chomutov, Most and, to a lesser extent, Hradec Kralové to do relatively well in the near future.
? What concerns do local businesses voice when considering a major financial transaction or merger with a foreign company?
In the initial stages and before a transaction is concluded, there are commonly issues of trust. When sharing business information, companies wonder whether the counter-party will hold up their side of the bargain or whether they are just fishing for market information on a potential competitor. In other cases, many foreign companies have unrealistic expectations of the timeframes needed to complete a transaction. This can lead to frustrations on both sides of a deal. We find that these and other problems can be avoided by making sure that both parties have advisers that have gone through the process many times and can guide the expectations of the parties.
? How has the strengthening crown affected foreign investment?
Many of our clients looking to either start or expand business here — especially clients that intend to export goods outside of the Czech Republic — complain that the appreciation of the crown will hurt them. It is a significant consideration when deciding whether to move or expand their operations here. Other businesses simply must have a presence here whether the crown has appreciated or not. They are either compelled to be near their customer base, or the advantages gained by basing their operations in Central Europe and the Czech Republic compensate for the increasing value of the crown.
 Want your manager to answer our 10 Questions? E-mail Markéta Hulpachová at mhulpachova@praguepost.com


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