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Tip sheet for Eastern Europe.

Tip Sheet For Eastern Europe

Even if investing in Eastern Europe means taking lumps early on, many Western companies may not have much choice if they want to defend or strengthen their competitive positions in world markets. When all of the foreboding problems and the perceived opportunities of going East are sorted out, the primary concern of the prospective investor is that economic and political upheavals in East Bloc countries are but parts of a rapid transformation taking place throughout the world. Thus, the company must determine where and how Eastern Europe fits into its plan to compete strongly on an international basis.

The drive toward free markets in Eastern Europe, for example, is dovetailing with the economic unification of the Common Market in Western Europe at the end of 1992. Together, the two blocs will form "a natural European market," in the view of Karl Dannenbaum, an executive director in the mergers and acquisitions department of Goldman Sachs International. "That will increase the share of Europe in world economic activity," he said. "Europe will get bigger and grab a bigger worldwide share and become more competitive."

While the enormous problems faced by the Eastern countries may be producing a "vacuum" in economic terms, Dannenbaum suggested that this should not deter long-range thinkers. "You cannot expect a vacuum to stand," he asserted. "Those that go into the vacuum will increase their power and their scale, reduce their unit costs, and become tougher competitors globally. There is good reason to be skeptical. There is good reason to be cautious. But in the long run, this is a fundamental change globally."

Growth prospects of specific Eastern European industries could be key to the timing of investments, according to Thomas G. Lewis, a vice president and director of Boston Consulting Group, based in the firm's Munich office. A business with strong short-term growth should be a target for quick action, Lewis advised. "It is a lower priority if the growth is over a longer term," he added. "The company should not stay out but position itself to monitor the industry, prepare for the longer run, and set itself for when the growth starts to take off."

Here are 10 no-nonsense recommendations: * Stick to your knitting. Stay focused and try not to go beyond your basic businesses. * Get a fix on how Eastern Europe figures in the global competitive positioning of your core operations. * Gird for a gut-wrenching restructuring of any Eastern European company that you invest in. * Perform heavy due diligence and continually fine-tune analyses for the vagaries of operating in Eastern Europe. * Figure your total investment on the purchase price (which may be a bargain) plus the costs of overhauling the investee (which may be huge). * Don't trust even your most conservative estimates of required investments. You probably will undershoot the actual costs. * Go straight to managers of individual companies to develop business projects before seeking government approval. That short-cut is encouraged in Hungary and Poland, and recommended in eastern Germany and Czechoslovakia. * Check out the social obligations that can inhibit restructuring options, such as work force reductions. * Be patient for the payoffs. * Learn when to say "no" to a proposition.
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Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Publication:Directors & Boards
Article Type:column
Date:Mar 22, 1991
Words:529
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