M&A panel III survey by CMS and FINANCE: M&A competition greater than ever
Frankfurt/Main – Sellers of attractive mid-cap and large-cap companies are currently rubbing their hands. A favourable environment and plentiful liquidity continue to ensure that buyers are queuing up, with the M&A rally likely to extend well into next year. Potential vendors would nonetheless be well-advised to keep a cool head because many deals are falling through due to excessive price expectations – despite the excellent market conditions. In addition, strong deal activity means a decline in the number of attractive M&A targets over time.
Those are the findings of the latest 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 feedback from corporate M&A staff highlights huge competition for suitable acquisition targets in Germany. On a scale of 0 to 10, they rate the competition situation at 8.25, the highest level ever recorded. M&A insiders also believe there are now fewer strategically appealing takeover targets on the market than in previous months. The number of respondents agreeing with the corresponding statement was down by 7.5% compared with the summer.
Strategists are losing their leading role
In view of the highly favourable financing environment, that is probably not a major disappointment. The survey indicates that raising finance now plays virtually no part as a deal breaker. “Private equity investors currently enjoy excellent access to finance,” commented CMS partner Oliver Wolfgramm. Despite high purchase prices, with many private equity investors under strong pressure to invest they can operate on equal terms with strategic investors in a highly competitive market, he added.
Meanwhile, it is becoming increasingly difficult for strategic buyers to drive their own growth and innovation through corporate acquisitions. For the first time since the M&A panel was set up in 2011, corporate M&A representatives no longer see themselves as having an advantage over private equity firms when competing for target companies. High cash reserves and attractive bank finance mean that private equity investors are prepared to pay very high purchase prices. This could motivate some vendors to sell their business to a private equity investor with deep pockets rather than a prospective strategic buyer, the panel authors predict.
Increasing focus on digitisation
45% of the strategically-oriented representatives of M&A departments stated that carefully selected acquisitions are now a key way of making a company more innovative. 40% do this at least occasionally, and only 15% report that it rarely happens. Asked why companies invest in innovative business ideas, 35% of those surveyed answered that they invest in new products or aim to open up new areas of business.
Digitisation provides another motive for companies to engage in M&A. For half of them, M&A is one of many drivers of their digitisation strategy, with a fifth regarding it as one of the main factors. For 20%, however, M&A plays no part at all in the digital transformation process, while 10% are currently still working on integrating M&A into their digitisation strategy.
CMS partner Thomas Meyding sees another M&A-related digitisation trend: “Acqui-hire often forms part of a digitisation strategy. The aim here is to hire teams to assist the company in implementing its digitisation strategy.” Systematic post-merger integration is crucial to the success of such transactions.
Everything has to be right
No matter how competitive the M&A market may be at the moment, potential bidders are not blindly ignoring the potential risks. Rather, they are increasingly insisting on specific compliance audits during the sales process. 40% have observed a sharp increase in the importance of compliance over the past five years, while for a further 30% of the M&A managers surveyed the importance of this factor has increased slightly. When making M&A deals, the ability to gain protection against certain risks, such as bribery or market-sharing agreements and price fixing, through compliance guarantees is important or very important for three quarters of respondents. “Reviewing compliance structures is now an established feature of every due diligence process,” said Thomas Meyding. To gain an initial overview, the CMS lawyer recommends looking at internal audit reports as a first step. He nevertheless feels it is essential to have a personal opportunity to “grill” the compliance officer, since the relevant issues often only arise during the course of a discussion.
Outlook very optimistic
Although the economic recovery that eventually followed the financial crisis is now entering its ninth year, market participants are very optimistic, given the low interest-rate environment and robust economic outlook. The workload of M&A advisors in the mid and large-cap segment also demonstrates that the upward trend continues. The figures show that compared to the June survey, their already high workload rose by a further 26%. Respondents confirmed their forecast that they would maintain this level over the next six to eight months. M&A lawyer Oliver Wolfgramm is likewise confident about the future: “We continue to see interested parties from Asia involved in almost all major sales processes and we frequently advise investors from the region on the buyer side.” For strategically attractive investments in important industries, this applies regardless of tighter Chinese capital controls, for example. The amended Foreign Trade and Payments Ordinance in Germany and proposals for additional rules at European level also appear to be having little impact on this state of affairs at present.