M&A panel 2020/II survey by CMS and FINANCE: Slow recovery of M&A market

Frankfurt/Main – The German M&A market is still being adversely affected by the coronavirus pandemic. Although sentiment is gradually improving, uncertainty remains a feature of the market and caution predominates. The findings of the second survey of the M&A panel by international commercial law firm CMS and FINANCE magazine show how senior staff in the M&A departments of German companies plus investment bankers and M&A consultants are responding to the current situation and reveal their assessment of the market.

Coronavirus continues to cause uncertainty in transactions

The coronavirus crisis currently remains the biggest source of uncertainty with regard to transactions in Germany. The corporate M&A professionals taking part in the survey give the crisis a score of 4.04 when asked to rate its impact on uncertainty, where 5 means a very severe impact. The future performance of potential takeover targets is also an issue. There was 3.08 respondent agreement with the proposition that potential targets are still suffering from the pandemic and that this negatively affects transaction certainty.

“It’s important to take a nuanced view here,” said Dr Thomas Meyding, Corporate partner at CMS. “Some companies are benefiting from the coronavirus crisis and doing exceptionally well. But some companies that have been hard hit by the coronavirus crisis are coming onto the market that would not otherwise be up for sale.” He added that it’s now very much a question of identifying companies that have a solid business model and “just need to sit out the coronavirus crisis”.

Having said that, firms are gradually regaining the confidence to do deals, as stopping M&A activity and waiting for the crisis to pass is not an option. Companies that abandon the field to the competition could find themselves at a disadvantage after the crisis. Deal drivers have also changed since the last survey in April. Cost cutting, industry consolidation and the acquisition of existing suppliers were then high on the agenda as the motivation behind deals. Companies are now more likely to buy in order to expand their product and technology portfolio (reflected in a score of 7.15 out of a possible 10 points) or increase their market share (7.04 out of 10 points). Companies are thus currently active in the M&A market with the aim of consolidating or expanding their market position.

Certainty becoming focus of transactions

Transaction certainty is of paramount importance for companies that are back in the M&A market, as transactions are fraught with greater uncertainty, especially due to coronavirus. Around 54% of respondents state that transaction certainty has become more important compared to the beginning of the year; more than two thirds of those surveyed say that deals have become more uncertain compared to the start of the year. Only around 23% see no change in this respect.

So on the one hand transactions remain subject to uncertainty, while on the other hand the desire for transaction certainty is increasing. This situation is reflected in every phase of the M&A process. When searching for takeover targets, more than half (58%) of the companies included in the survey intend to invest more time in sourcing deals over the next six months. Just under a third estimate the effort required to be just as high as in the past, with only 12% expecting less work to be needed. This is also evident in the amount of time required for due diligence, with 46% intending to invest more time in due diligence than they did a year ago.

Protection also a priority when drawing up purchase agreements

Companies also want to be on the safe side when drafting purchase agreements. Around 65% intend to invest more time over the next six months in considering purchase price arrangements and contract design than just under a year ago. 31% expect to spend the same amount of time on these tasks going forward as they did a year ago. This trend is apparent on both the seller and the buyer side. Buyers are seeking to protect themselves with purchase price adjustment mechanisms (earn-out clauses, 27% of respondents; MAC clauses, 15% of respondents). 12% aim to protect themselves by withholding parts of the purchase price.

The seller side is using locked-box mechanisms for protection (25%). Contractual terms are being deferred by around one third when required by law. Around 8% are using escrow accounts instead of retaining part of the purchase price. The outcome is that negotiations are now perceived to be exceptionally long. Consultant agreement with this statement comes in at 6.9 out of 10, while companies rate it at 6.4. “A look at the trend in deals during the financial market crisis shows that back then there was a sharp increase in transactions with fixed purchase prices, without any purchase price adjustment mechanism, usually in conjunction with locked box mechanisms,” said Dr Thomas Meyding. “Higher liability caps for warranty claims were also a feature.” Meyding sees a similar trend in the current crisis with regard to the transactions now in progress.

Recovery in financing availability for M&A deals

Compared to the April survey, respondents have a much more positive perception of the financing environment. In April, the score for acquisition financing was 4.18; it now stands at 5.23, where 10 indicates a clear improvement in the financing environment. Nonetheless, firms continue to rate their own cash reserves as the most important source of finance (8.12, with 10 indicating a very important financing option). This trend has been in place since April, although at that time companies rated their own funds as even more important, as evidenced by a score of 9.1. Dr Oliver Wolfgramm, Corporate partner at CMS, confirmed that the financing market has indeed recovered. “However, lenders are more demanding and due diligence is more extensive, with processes taking much longer,” noted Wolfgramm.

Software sector stable in the crisis

The most active sector in the crisis is currently the software industry, coming in at 8.4 (where 10 represents a very active sector). Activity has increased here compared to the spring analysis, when it scored 7.76. The pharmaceutical/healthcare sector is close behind at 8.13 – having been almost level-pegging with the software sector in the spring survey (7.47). The telecommunications, retail/e-commerce and food & beverages sectors also posted increased activity. This reflects the fact that people relied more on online shopping during the lockdown. It is thus hardly surprising that M&A activity by companies in these sectors also increased.

M&A advisors continue to suffer from the crisis

M&A consultants have not escaped the crisis unscathed to date, but the damage seems to be less serious than feared in April, with a belief that the market has now bottomed out. Nonetheless, this is the second survey in a row in which M&A advisors rated their current project deal flow as below average. They estimate that their future project deal flow over the next three to eight months will be marginally above average again. Small-cap consultants are somewhat more cautious than advisors to mid-caps and large caps. Companies likewise expect the environment for M&A deals to improve further in the next twelve months. “The shock was huge. This makes the relief all the greater that projects were successfully completed despite the crisis, and that projects which had been put on hold were resumed,” said Dr Oliver Wolfgramm. That is a positive sign for the future, and also opens up new opportunities, not least in distressed M&A, commented Wolfgramm.

Press Contact
presse@cms-hs.com