Germany: Shifting M&A market reflects broader global trends
- Inbound German deal value falls by 68% year-on-year in Q2 2019
- Outbound German deal value falls by 72% in the same period
- Domestic dealmaking environment remains strong, driven by blue-chip strategic partnerships
- Private equity investors target public companies through club deals and Mittelstand businesses
Over the past five years, Germany has come to be seen as one of the most stable investment destinations in Europe. With uncertainty plaguing much of the rest of the continent, German companies have benefitted from sustained international interest and high valuations to pursue expansive acquisition strategies.
With global uncertainty ratcheting up still further in 2019, the M&A market is now slowing, and the German market has also seen a marked shift in how and where its companies do deals.
Inbound investment stalls as government intervenes
In recent years, Germany has proven a fertile hunting ground for investors from both North America and the Far East, but 2019 has so far proven to be slower going.
Deal Dynamics data shows that the value of inbound investment in Germany fell by 68% in Q2 2019 when compared with the same quarter last year. In the previous quarter, only 175 inbound deals occurred in Germany, the lowest number in a single quarter since Q4 2015, and short of the peak seen in Q2 2018, when inbound activity totaled 237 deals.
Part of this slowdown can be attributed to foreign investors focusing on their less stable home markets and being more selective when pursuing cross-border M&A opportunities as a consequence.
That said, it’s worth keeping an eye on Berlin. The German government has historically taken a lighter touch approach in regulating inbound investment, especially when compared to its contemporaries in Washington or Paris.
However, over the past 18 months, Berlin has come under increasing pressure to intervene in transactions that could jeopardize (or be perceived to jeopardize) national security or critical infrastructure.
The implicit target of this pressure was China, following a spate of Chinese investments in German companies that led to heightened levels of public skepticism about the motives of sometimes less transparent buyers.
Last summer, the German government made its move, blocking direct Chinese investments in machine tool manufacturer Leifeld and high-voltage energy network operator 50Hertz.
This was followed by further tightened regulation. In December 2018, Berlin announced that it would be able to intervene should any investor from outside the European Union acquire a “direct or indirect” holding of 10% in a German company – down from 25% – and that it would be working with France and Italy to discuss similar protective steps at the EU level.
And while it’s only Chinese investors that have so far fallen foul of this change in tack, heightened government interventionism may well discourage would-be buyers from other nations.
Blue-chips look to partnerships over aquisitions
In 2016, we saw some of Germany’s largest companies looking across the pond to North American targets in an attempt to build global brands. Three years later, and after a number of antitrust, litigation, and integration issues, outbound German M&A also appears to be slowing down.
While it’s too early to declare the end of the outbound mega-deal, cross-border transactions to match Bayer’s €56.5 billion takeover of Monsanto, or Linde’s US$90 billion merger with Praxair are beginning to look like the exception, rather than the norm.
Deal Dynamics data from Q2 2019 shows that the value of outbound deals by German companies fell by 72% year-on-year when compared with the same quarter last year.
It appears Germany’s blue-chips are now looking to partnerships rather than acquisitions to future-proof their businesses. The automotive industry is leading the way in this regard, with former rivals joining forces to respond to the challenge being posed by some of the world’s largest technology companies.
Earlier this year, BMW and Daimler announced that they would be combining their mobility services to launch a joint offering around services, charging, taxi-hailing, parking and car-sharing.
Rather than acquiring individual businesses in growing areas such as e-mobility and connected cars, automotive manufacturers are increasingly building new alliances and pooling their resources to build their own capabilities.
Private equity looks to public martkets and Mittlestand
The majority of the global private equity players have a strong foothold in Germany and have spent the first half of 2019 raising increasingly large sources of capital through new funds.
They are now sitting on a cash pile estimated to be as high as US$2.44 trillion. This “dry powder” means they are being forced to deploy capital in new ways. As part of this, we have seen a continuation of the trend towards club deals, where private equity investors form a consortium to take on an asset that would otherwise prove too large.
This trend started when CVC and Advent International came together to acquire perfume and cosmetics retailer Douglas in 2015 and firmly took hold when Bain Capital and Cinven won the bidding war for drugmaker STADA Arzneimittel two years later.
The trend has continued into 2019, with Bain Capital and Carlyle just this month launching a takeover bid for Osram Licht, which was listed only six years ago.
Private equity investors are also raising capital by investing in the Mittelstand, a cohort of about 3.3 million small and medium-sized enterprises across the country and often described as the “hidden champions” of German business.
Mittelstand companies have historically been put up for sale to solve tricky succession issues. However, in recent years, Germany’s previously conservative family-owned companies have started turning toward external investment to secure their place in increasingly global industries. For example, EQT took a minority stake in prosthetics company Ottobock in 2017 to support global growth and drive innovation, according to its official statement.
The relationship between private equity investors and Mittelstand companies is mutually beneficial. Mittelstand companies were previously averse to accepting investment from private equity. However, with traditional forms of bank funding proving harder to come by than before, this form of investment is important in allowing them to build their businesses for the future.
Technology set to drive the market
Looking forward to the second half of the year, technology will likely continue to be the driver behind both domestic and international M&A in Germany.
From international blue-chip companies to regional family businesses, companies will need to work together to future-proof their business models against broader shifts brought about by major technology players.
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