Frankfurt/Main – The M&A transactions market remains extremely robust ten years on from the financial crisis. The main reason cited by M&A managers in German companies for their ongoing deal hunger is the desire to accelerate their own growth and keep pace with the advancing digitisation of the business world. Those are the findings of the latest survey of the M&A panel polled three times a year by commercial law firm CMS and FINANCE magazine. Senior employees from the M&A departments at German companies plus investment bankers and M&A consultants provide anonymous assessments of the market for the survey.
“We can confirm a consistently high level of M&A activity,” said Dr Oliver Wolfgramm, Corporate partner at CMS Germany. “2018 has been a seamless continuation of 2017 so far, without the pause typically experienced in January. Both strategic and private equity investors are very aware of the powerful trends towards digitisation and automation, and are seeking to address these developments through acquisitions,” Dr Oliver Wolfgramm continued.
M&A advisors report record workload
Compared with the November survey, the workload of M&A advisors has increased further to reach a new record high. The current boom exceeds the previous peak reported by the M&A panel in February 2016. In particular, consulting firms with a focus on mid-cap and large-cap deals have their hands pretty full, with their workload rating being the highest since the projection indicator was launched in June 2014. M&A advisors are predicting a further rise in project deal flow over the next three to eight months.
Time is of the essence
Every company naturally wants to take advantage of this positive momentum to achieve their objectives. That makes it all the more important to avoid becoming bogged down in the actual negotiations. CMS partner Dr Thomas Meyding sees bilateral negotiations taking place chiefly with companies that are less favoured.
“For tactical reasons, it is nevertheless advisable to arrange the process such that it can be converted into an auction procedure at any time,” said the M&A lawyer. From a seller’s viewpoint, this should mitigate the disadvantages of exclusive bilateral negotiations. “The crucial issue when agreeing exclusivity is to apply a time limit, thereby making it possible to engage with other interested parties,” said CMS partner Meyding.
IT firms most active
On a scale of 1 (= companies in the industry are not active in the M&A market) to 10 (= very active), the surveyed M&A advisors view the software and IT sector as being the most active industry at present, coming in at 7.67. One reason for the high level of activity in this sector could be digital transformation. It not only means that IT companies are on a growth trajectory, it also makes the firms themselves attractive as takeover targets. Corporate M&A managers confirm this, stating that deals are driven to a large extent by a desire to expand their product and technology portfolio (7.91). But it is not only software and IT companies that are particularly active on the mergers and acquisitions front at present, as assessed by M&A consultants. The respondents believe that the pharmaceutical and healthcare sector (7.28) and the service sector (7.07) are similarly buoyant.
Takeover targets often overpriced
Despite strong demand for suitable takeover targets, M&A managers in companies see a 13% increase in strategically attractive targets compared to the previous survey. The catch is that the surveyed corporate M&A managers and specialist M&A advisors both believe that asking prices are frequently excessive. Corporates gave this issue a score of 8.73, the highest figure since the M&A panel was first surveyed in February 2011. The picture is similar for M&A advisors, with the level of agreement reaching 7.70.
Price is the principal deal breaker
It is therefore unsurprising that buyers and sellers often cannot agree on a valuation in M&A procedures. Corporate M&A managers largely agree with the proposition that the valuations of the negotiating parties in M&A procedures are too far apart at present, at 7.41 points. This represents a further rise of almost 10% compared to the previous survey.
“In the case of attractive targets that are also in sought-after sectors, we are seeing a strong seller’s market with very high prices and further upside potential,” CMS partner Dr Oliver Wolfgramm said, confirming the panel’s findings. “This strong seller’s market is reflected not only in high purchase prices, but for example also in the seller-friendly core content of purchase agreements. Even though initially there is often a gulf between the different purchase price expectations, buyers usually have no option but to make concessions if they wish to acquire an attractive target company,” commented Dr Oliver Wolfgramm.
Many buyers are responding to the very high overall price level by planning to devote more time to due diligence this year (41%).
Risk-oriented due diligence reports in demand
Nonetheless, the trend appears to be shifting from comprehensive due diligence to a faster red flag report. When asked about the importance of various legal criteria, only around 14% of corporate M&A managers expect conventional due diligence to gain in importance, while 23% forecast a decline.
Dr Thomas Meyding, Corporate partner at CMS Germany, notes two key trends in relation to due diligence. “Firstly, digitisation is increasingly playing a major role, with software being used to sift through large quantities of data. We have already achieved some excellent initial results using this technique.” Secondly, risk-focused due diligence is becoming more prominent. Meyding added that human expertise is needed here in order to identify risks quickly and quantify them.
The M&A panel confirms the trend towards due diligence reports (red flag): 28% expect their importance to increase, while only 10% see a decline.
Financing environment still very supportive
The high level of M&A activity is being boosted by ongoing excellent financing conditions, both for companies and for private equity investors. Although the M&A market is currently basking under a cloudless sky, M&A professionals are increasingly factoring in a possible return to rising interest rates. Respondents believe that borrowing is still cheap and negotiations with banks are mostly straightforward. Agreement with the statement that bank loans are expensive and bank negotiations are difficult and complicated is accordingly still very low, at 4.05 (10 = complete agreement). Nevertheless, 37.3% more respondents agree with this proposition compared with the previous survey.
M&A professionals rely on own funds
At present, however, the very supportive financing situation continues to apply both to strategists and to private equity investors. The surveyed M&A consultants give the financing environment for strategists a score of 8.40 and for private equity firms of 8.33 (10 = excellent). Although bank loans remain very cheap, M&A departments are relying primarily on their own cash reserves to finance acquisitions. They rate the relative importance of their own funds at 8.27 (10 = very important). At 5.91, bank loans come a distant second. As such, there is good reason to believe that the M&A rally will continue even if we see a moderate rise in interest rates.
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