M&A-panel surveyed by CMS Hasche Sigle and FINANCE: Cautious optimism in the German M&A market

Stuttgart/Frankfurt am Main – The German M&A market appears to have passed its low point. After the subdued deal flow in autumn 2011, both corporates and investment bankers believe that the environment for deals will improve in the months ahead. Nonetheless, investment bankers still see the financing environment and economic situation as deal breakers. As a result, current assessments of the situation fall significantly short of the top figures recorded a year ago. That is the conclusion of the latest survey of the M&A panel organised by CMS Hasche Sigle and FINANCE, in which some 60 M&A heads of large companies and leading investment bankers participated.

"Continuing weak confidence in the state of the economy is reflected in the rising relevance of MAC clauses and the high level of importance that investment banks attach to assured financing of transactions, for example," says Dr Oliver Wolfgramm, partner at CMS Hasche Sigle. In contrast, corporates view the weak financing environment much less critically because they regard their own liquidity as the crucial element in transaction financing.

As in the autumn, investment bankers still believe that strategic investors have a clear advantage over private equity (PE) investors. While the financing environment for strategic investors appears to have improved slightly since October (up 9% to 6.71 points) in the opinion of bankers, it has deteriorated further for PE investors (down 5% to 3.71). Accordingly, they are not expected to be very active in the M&A market. The surveyed bankers anticipate that companies will be more of a force in the months ahead. For their part, corporates also see themselves firmly on the buyer side: on a scale from 1 (seller) to 10 (buyer), their ranking averages 7.81 (October: 7.41).

Investors from emerging markets could give the M&A market an additional boost this year. Three major sales of German companies (Saargummi, KSM Coatings and Putzmeister) to Chinese investors made headlines recently. The panellists see this as just the beginning, with increasing numbers of potential buyers from emerging markets appearing on the scene. Dr Thomas Meyding, partner at CMS Hasche Sigle, expects the sale of German companies to Chinese investors to have knock-on effects. When SMEs come up for sale, potential buyers from China will increasingly be among the interested parties and possible bidders at auctions. "They are on the radar of investment banks," notes Meyding.

Prospective buyers from inside and outside Germany are competing for fewer and fewer suitable targets. The statement that there are attractive takeover targets on the market met with less agreement (6.23) than in October (6.84). For this reason, CMS partner Wolfgramm expects even tougher competition for interesting targets in the months ahead. "Despite the still very tight financing environment, PE investors remain competitors for strategic investors," he stresses. "PE investors continue to have access to sufficient borrowed capital for really good targets."

Potential buyers are taking a very careful look at any attractive takeover target they do identify. Investment bankers and corporates alike are paying much more attention to a range of legal and tactical aspects. "Buyers are very risk aware," says Wolfgramm. There is also an increasing desire to hedge transaction-related risks. This trend is evident in the growing importance of escrow accounts to "freeze" part of the purchase price, which is then available for a specified period of time to provide cover for any claims for compensation. 44.4% of investment bankers consider this aspect to be more relevant than in the previous year, with the same percentage believing that comprehensive due diligence has become more relevant.

Comprehensive due diligence is likewise more important for M&A bosses than in the previous year. According to CMS partner Meyding, there is a balance to be struck between reviewing the risks in detail and losing sight of the cost: "People are aware that transactions are now much more likely to be broken off even at a late stage. As a result, the cost of due diligence comes in for far more scrutiny than was the case before the financial crisis." The requirement to be the exclusive negotiating partner is also becoming more widespread, comments Meyding. This exclusivity is intended to safeguard the potential bidder from ending up as an also-ran in a competitive situation. In this context, Meyding also expects a revival of break-up fee negotiations. The relevance of exclusivity in negotiations has risen for 45.2% of M&A bosses, compared with a figure of 26.3% in the previous year. More than half of the investment bankers participating in the survey share this view.

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