Frankfurt/Main – German companies are losing their appetite for M&A. Political uncertainties such as Brexit, concerns about tighter investment controls and high purchase prices are all tempering deal-making ambitions. Companies looking for strategic investments are particularly sceptical about new acquisitions. The picture is different when it comes to M&A advisors, though – they forecast a significant rise in their project workload. Those are the findings of the survey of the M&A panel polled three times a year by international 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.
The M&A chiefs taking part in the survey believe that the overall economic situation is the most common cause of failed transactions. The corresponding ranking of 4.77 (10 = very important deal breaker) is the highest figure recorded since February 2016. The consulting firms surveyed took a similar view (4.33). Corporates are now also increasingly taking account of possible regulatory objections. While the relevant score in June was 3.35, it rose to 4.27 in the current survey, representing an increase of around 27%. Discussions about a change in shareholding limits are symptomatic of this issue, with Germany’s Federal Ministry of Economics intending to scrutinise such limits more closely in future. Investments by Chinese investors in particular would be affected. “In Germany, there is currently talk of lowering the trigger threshold for intervention from 25% to 10%,” said Dr Thomas Meyding, Corporate partner at CMS in Germany. Concerted action on reviewing foreign investments is also being considered at European level, he added. “It’s interesting to note that the vast majority of companies are opposed to any tightening of these regulations,” Meyding continued.
Corporates falling behind
Alongside political and regulatory challenges, purchase prices continue to be a major issue. Valuations for M&A targets remain extremely high. Financially strong private equity funds are increasingly pushing strategists onto the defensive. Many PE funds are under extreme pressure to invest and are actively wooing targets. Corporates had long felt superior to PE in the competition for attractive targets, but the balance has been steadily shifting since October 2016. Asked whether strategic investors have an advantage over PE investors, M&A bosses deliver an agreement rate of just 4.86 (10 = complete agreement). This marks the lowest figure since the M&A panel was launched in February 2011. Company representatives assign a score of 5.82 to the proposition that there are currently few strategically attractive firms on the market (10 = complete agreement). M&A managers widely support the statement that purchase prices for the few available targets are in many cases excessive (score: 8.36). In addition, the parties tend to differ with regard to the valuation of target companies. Corporate representatives rate this divergence as a major deal breaker, giving a score of 7.05 (10 = very important deal breaker).
The M&A boom is over
From the perspective of M&A managers, the market for deal financing is healthy but treading water. A figure of 5.27 (on a scale from 1 = drastically deteriorated to 10 = significantly improved) for the availability of acquisition finance in the past twelve months underlines this view. Similarly, the panellists don’t expect any improvement in the M&A market or a better environment for deals over the next twelve months. This assessment is also apparent in the positioning adopted by M&A chiefs. When asked whether they see themselves more as buyers (score of 10) or sellers (score of 1), the company representatives polled chose an average of 7 – the lowest figure since October 2016. “The financing environment remains very positive, but is likely to deteriorate in the coming months due to the uncertain economic outlook,” said Dr Oliver Wolfgramm, Corporate partner at CMS in Germany. “Accordingly, the industry in which the target operates and the company’s susceptibility to cyclical fluctuations are increasingly crucial factors in the financial viability of a transaction.”
Automotive industry no longer on the wish list
The panel rated the automotive sector as being the biggest loser of deal activity. Consulting firms reported a significant decline of 19% here compared with the last survey (score of 10 = very active, currently 5.3). By contrast, transactions involving software and IT companies are extremely popular at present. Consultants gave M&A activity in this sector a score of 8.09, corresponding to a substantial increase of around 22% compared with the last survey in June. “We are currently seeing a large number of transactions in the technology, media and communications sector. Interestingly, the vast majority of buyers are non-tech companies,” commented Thomas Meyding. For many companies, acquiring software and IT companies is a response to the challenges posed by digitisation and Industry 4.0. “The first evidence of distressed M&A activity is emerging in the automotive sector, with the number of distressed transactions in the automotive space likely to rise significantly,” predicted Meyding.
Compliance audits gaining in importance
The importance of compliance audits for transactions continues to grow for the company representatives surveyed. More than 86% of M&A managers state that the importance of compliance issues has increased slightly or even considerably over the past five years. This follows a strong rating of 70% in the previous year. Transaction practice backs up this assessment: more than 81% of panellists from companies rate it as important or very important to explicitly protect themselves against compliance risk when making an acquisition. “The tougher audit requirements being adopted with regard to corporate compliance are reflected in the importance attached by buyers to corresponding warranties in sale and purchase agreements. The challenge is to negotiate a reasonable balance between the buyer’s aim to achieve the most comprehensive protection possible and the seller’s desire to agree realistic and thus limited guarantees,” said Oliver Wolfgramm.
M&A advisors remain optimistic
The increasing caution being shown by companies in the M&A market doesn’t appear to be having any impact on M&A advisors – their order books are still well filled. Consultants rate their workload the same as in June of this year, i.e. still above average. Currently, the average workload is 2.01 on a scale of –5 to +5, where 0 represents average project deal flow.