The conditions in the German M&A market are now considerably better than a year ago, although strategists do not expect any significant rise in transactions before the end of the year. Private equity investors are back in the market as players. Those are the key findings of the survey of the M&A panel III 2013, polled now for the ninth time by CMS Hasche Sigle and FINANCE magazine. The heads of the M&A departments at German companies plus leading investment bankers and M&A consultants provide anonymous assessments of the market for the survey.
Price and contract details are decisive
The survey suggests in particular that the macroeconomic environment and financing terms are no longer a major obstacle to advisors and bankers. While this area was the reason for the failure of many transactions just a year ago, it is now assessed at a record low level. Even in previous surveys, corporate M&A managers invariably viewed the uncertain overall economic situation and finance environment less critically and now rate both as hardly posing any threat at all. Both groups currently see diverging price expectations as the most common deal breaker. Company managers, however, now attach unprecedented importance to disagreement about contract details as a reason for the failure of transactions. For CMS Hasche Sigle partner Dr Thomas Meyding, one cause is that commercial sticking points which have been overlooked or put aside during the initial stages resurface during contract negotiations and prevent agreement being reached: "That’s not necessarily a bad thing. Overlooking a commercial risk is a worse solution for one of the parties involved."
Private equity investors return as serious competitors
Both groups are also optimistic about market prospects over the next twelve months – expectations have risen by 15% in the case of corporates, compared with the summer, while bankers are 8% more optimistic. In addition to strategists, private equity investors are also keen to take advantage of the positive market conditions and are again perceived by both banks and corporates as serious rivals. The significant advantage when competing for attractive target companies that was recorded as recently as the summer has melted away to its lowest value since the survey was launched in February 2011. One of the principal reasons is that since March 2012 financing conditions for the private equity sector have steadily improved according to panel participants. This is also confirmed by the latest private equity panel surveyed by CMS Hasche Sigle and FINANCE: the surveyed PE firms assessed their financing terms as 14% better than in the summer and more attractive than at any point since the survey started in 2010. CMS Hasche Sigle partner Dr Oliver Wolfgramm sees an ongoing trend here: "We found in the summer survey that private equity investors are again competing practically on a par with strategic investors for attractive targets." As a result, M&A chiefs are experiencing much greater market competition. Around 10% more of them see intense competition for target companies in Europe than was the case in the summer, while for targets outside Europe the figure is up some 6%. "Competition for the still low number of attractive targets in favoured industries necessarily results in high and rising price demands on the part of sellers, while also confirming the continuation of a seller’s market as seen in previous surveys," comments Dr Wolfgramm.
Changes in target sectors
The most active industry is currently perceived to be machinery and engineering (up 9%), followed by automotive (up 14%). The respondents rated the telecommunications sector as more active than ever before, primarily boosted by major transactions such as Kabel Deutschland/Vodafone and Telefónica/E-Plus (up 11%). The one-time great hope, renewable energy, has experienced a dramatic collapse to a new low. Similarly, the private equity survey ranked this sector in second-last place.
Modest outlook for rest of year
Market participants are cautious regarding any significant rise in M&A activity as the end of the year approaches. Although corporates in particular see the relatively large transactions of recent weeks as a potentially positive signal, strategic investors are much less inclined to agree with the view that these deals encourage them to become more active in the M&A market. Bankers and M&A consulting firms have an even more sceptical view of the situation, despite the fact that the previous survey indicated that 65% had a deal pipeline filled to average levels and 27% even reckoned that it was above-average. "We find that, in terms of numbers, we are still involved in a lot of transactions," says Dr Meyding. "However, there has been a substantial drop in the likelihood that a deal will complete. Alongside the macroeconomic climate, increased risk awareness is definitely a crucial factor, with buyers wary of taking on risk." There is nevertheless hope for the medium and long term. In the pan-European M&A Outlook survey recently published by the CMS organisation of law firms, representatives of companies, private equity houses and law firms were extremely optimistic. More than half of the respondents in German-speaking countries believe that deals will increase in the next twelve months, or even increase sharply.