M&A panel 2018/II survey by CMS and FINANCE: German companies are driving the M&A market – but purchase prices are going through the roof

Frankfurt/Main – German companies remain keen to invest, with the German M&A market continuing to see more buying than selling. German corporates are also increasingly relying on their own staff, with external M&A advisors only being brought on board in half of the transactions at most. Those are the findings of the second 2018 survey of the M&A panel, which is 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 trend remains positive: more than three quarters of the surveyed corporate M&A departments intend to continue making acquisitions, mainly in familiar markets. Only 12% of respondents stated that selling businesses or entering into joint ventures are the focus of their current efforts. The main driver of M&A activity remains the company’s own strong performance.
“Several factors may be steering companies towards focusing on markets they are already familiar with, alongside their domestic market. Such factors include global political uncertainty, with the world becoming a more complicated place generally plus the additional threat of an economic war between Europe and the US. Investment conditions outside Europe and especially in emerging markets are not always simple and definitely not reciprocal,” said Dr Oliver Wolfgramm, Corporate partner at CMS in Germany.

Corporate growth aspirations set the pace

Panellists report that the primary deal driver is and remains their own company’s desire for growth. A score of 8.59 (on a scale from 1 = unimportant to 10 = very important) marks a new peak for this deal driver since the survey started seven years ago. However, companies are shifting their search for growth to familiar territory in order to boost their market share. The score of 6.88 for this response represents a rise of around 4% compared to the previous survey. Although expansion into new markets scored an almost identical 6.82, this marks a decline of over 4% compared with the last panel. The fact that M&A bosses evidently don’t see all markets as offering suitable takeover targets is a possible explanation here. Agreement with the statement that good buying opportunities are available in emerging markets now only stands at 3.94 (10 = complete agreement), representing a drop of 16% compared to the previous survey.

Purchase prices reach new record levels

The prevailing strong demand for attractive targets has its downside: respondents believe that purchase prices are going through the roof. M&A advisors mostly agree with the proposition that prices are excessive in many sectors, with a score of 8.76 out of 10, where 10 = complete agreement. Corporates roughly share this assessment of purchase price trends, at 7.95 (10 = complete agreement). These scores are the highest recorded since the survey was first conducted in 2011. In addition, consulting firms take the view that buyer and seller valuations of available targets are too far apart in many cases (7.21 agreement score).
“This trend also explains the increasing appeal of earn-out clauses, especially in certain sectors. Earn-out provisions enable part of the risk associated with the target’s future performance to be shifted to the seller,” said Dr Thomas Meyding, Corporate partner at CMS in Germany. According to Meyding, earn-out clauses nevertheless often involve highly complex structuring and require a lot of experience in order to achieve the right combination of security for the seller and flexibility for the buyer in managing the target.

Regulators less likely to become deal breakers

While differing price expectations are an increasingly common reason for transactions to fail, there has been less regulatory intervention in deals of late. The likelihood of a regulatory objection is assessed as low (with a score of 3.35) by the surveyed M&A managers on the corporate side. This represents a decrease of 19% compared to the last survey in February, and is also the lowest figure for two years. On the advisor side, this point is likewise not seen as an issue, with a score of 3.57 being recorded.

Deals are increasingly being handled without external assistance

M&A consultants may be enjoying full order books, but German companies are increasingly trusting in their own in-house expertise. The survey indicates that a majority of companies rely on external support for no more than half of transactions. The corporate world is split in its response to the question of hiring M&A consultants. 41% of the surveyed corporate M&A managers instruct external M&A advisors for up to one in four transactions. Around a quarter of respondents get consultants on board for up to half of their deals. A further 29% of the company representatives surveyed, meanwhile, engage an external consulting firm for at least three out of every four M&A deals. Once a decision has been taken as to which resources to use, the same set-up seems to remain in place for an extended period. 71% of respondents state that the proportion of transactions in which they draw on external support has not changed over the last two years. However, almost 18% of survey participants say that this proportion has fallen, or fallen sharply, of late.

M&A boom could soon be over

Despite favourable financing conditions and a benign regulatory stance, many panellists believe that the M&A boom may be about to peak. Agreement of M&A advisors with the proposition that the environment for M&A deals will improve further in the coming twelve months scores just 4.74, a 15% decrease compared to the last panel results. Looking back, this is actually the lowest score since October 2011. On the corporate side, there is a similar wariness about the future. The recorded score of 4.71 represents a 7% decline compared to the last survey in February.
“In the past, events have typically occurred that led to a fall in M&A activity,” explained Thomas Meyding. “Compared to the M&A situation before the financial crisis, it is notable that buyers are still risk-aware when making acquisitions and that transactions are taking considerably longer. This is chiefly due to in-depth due diligence,” said Meyding. “Purchase prices may be stretched in some cases, but buyers are generally very aware of the target’s risk profile.”

Financing side benefits from good levels of liquidity

When it comes to financing a deal, companies currently have considerable resources of their own available. In the assessment of the surveyed M&A consultants, a poor financing environment is rarely a factor when a deal fails to complete. This is evidenced by the lowest agreement score since the first survey back in 2011, at 2.40. The preferred financing instrument among the companies surveyed nonetheless remains their own funds. M&A managers assign this option a score of 8.29 (10 = very important financing instrument), followed by bank loans with the second highest score of 6.82.

“The financing environment remains very good. That applies both with regard to access to debt finance and to the conditions attached,” commented Oliver Wolfgramm. “Due to the cash resources on hand and the continuing excellent availability of debt finance, no transactions are failing due to a lack of funds,” Wolfgramm continued.

Cautious about future workload

Although many companies rely heavily on their own resources when handling M&A transactions, M&A consulting firms continue to report above-average order book levels. But when asked about their future workload, mid-cap and large-cap advisors in particular have become much more cautious. On a scale of -5 to +5, where zero (0) represents average project deal flow, M&A consultants report a score of 2.02 across companies of every size. This represents a slight decline over the last survey.

If one compares the figures cited for current workload with the forecasts made in the February survey for the next three to eight months, small-cap advisors have again fallen well short of their anticipated workload. In the last survey, they expected a score of 1.95, but are now reporting an actual workload score of 1.68. This is the fifth time in a row that they have failed to hit their forecast. Mid-cap and large-cap advisors are more realistic in this respect. They estimate their order situation at 2.35 for the coming three to eight months, i.e. they believe that their workload is set to remain at an above-average level.

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