Since the beginning of the year, the global mergers and acquisitions (M&A) business has recovered quickly from the deep slump caused by Covid-19 in 2020. In 2021, the number of M&A transactions involving German companies will increase by at least 50% year-over-year. Despite the one-off catch-up effect, many drivers suggest that the German M&A market will maintain its strong momentum in 2022.
Despite the ongoing uncertainty surrounding the Coronavirus pandemic, transaction activity in Germany in the summer of 2020 is characterised by strong euphoria: In August alone, various large and visible takeovers of listed companies were announced including Deutsche Wohnen, Hella, Zooplus and Schaltbau. Strategic buyers and financial investors are engaged in enormous bidding wars in the M&A processes, and company owners can enjoy high valuation multiples and seller friendly SPAs. The active M&A investment banks in Germany remain very active with numerous mandates.
This development is quite astonishing, considering that in the Coronavirus era, foreign travel, face-to-face management meetings, negotiation rounds and site visits have been very much limited. However, professionals in the M&A market have quickly and strongly embraced new possibilities offered by video communication, insofar that M&A could be initiated and implemented well without traditional face-to-face meetings and business dinners.
The general M&A sentiment is more positive than it has been for years. Inorganic growth is at the top of the strategic agenda for large corporates, because the high share prices of most companies can hardly be justified purely by organic growth. As a result, we expect the high level of deal activity in Germany to continue into 2022, and not only as a result of catch-up effects. While the market has been characterised by a booming economy in recent years, we anticipate other drivers for M&A transactions will take center stage in the future.
Outlook of deal drivers for the German M&A market 2022
- Low interest rates / high share prices
- Globalization of markets and pressure to achieve critical size
- Digitalization / Industry 4.0 as a competitive advantage
- Securing supply chains / reducing dependencies
- Sale of private equity portfolio companies
- Shareholder activism / corporate divestments
- Investment pressure among private equity investors
- Aggressive acquisition financing
The high valuations on the stock markets are also increasingly being observed in private M&A transactions. Multiples of 20 times EBITDA in the last 12 months are no longer an exception for software, telemedicine, e-commerce and fintech companies, and such valuations are quite achievable for well-positioned industrial companies.
The need for larger corporate entities with global footprints is forcing many mid-sized companies to sell to a larger or financially strong partner. For many companies, the opportunities and challenges associated with the topic of digitization are strategic motivations for M&A. For many German SMEs, for example, the transfer of technology is a proven means of compensating for a lack of digital expertise and avoiding time delays in the introduction of new products and services.
For owners of profitable, healthy companies in particular, the window should be wide open in the coming 18 months for a successful company sale on attractive terms. In addition to the willingness to sell among family businesses, we expect a veritable wave of exits, particularly in private equity, among those portfolio companies for which a sale was not possible in 2020 nor 2021 as a result of the pandemic.
In order to protect themselves from activist shareholders, large corporations must core parts of their business in order to generate liquidity and better focus or shareholder returns. Corporate carve-outs remain an important driver of M&A activity, for example as a result of the successful spin-offs of Siemens Healthineers and Siemens Energy, the senior managers are finding such transactions appealing. Due to the continuing fluid market environment, we therefore expect a significant increase in corporate divestments. However, these will primarily be underperforming business activities that will impact the return and growth profile of larger quoted companies.
The ongoing zero interest rate policy of central banks is generating an enormous and steady inflow of capital into private equity funds worldwide. The funds collected are constantly reaching new record levels, which means that the investment pressure on financial investors is also growing. The trend is also being fueled by the rise of debt funds. These private credit funds have also raised billions of euros which must now be deployed in the form of aggressive acquisition financing. In Germany, a financial investor already acts as a buyer in roughly every third company sale with a valuation of 50 million euros or more. The trend is for the proportion of private equity deals to increase further in the coming years.
Industry sectors with anticipated strong M&A activity 2022
- Software and IT Services
- Industrial Technology / Fin Tech
- Healthcare / Pharma / Med Tech
- Engineering / Capital Goods
- Automotive (“distressed“)
- High Street Retail (“distressed“)
We expect almost all sectors to be affected by M&A. We anticipate above-average activity for those sectors that are emerging stronger from the Coronavirus crisis. For example, strategically motivated, highly valued deals will continue to take place in non-cyclical and fast-growing sectors such as healthcare, medical technology, biotechnology, software, IT services, industrial technology or e-commerce. In cyclical industrial sectors and in retail, so-called distressed deals will increasingly be on the agenda. We expect a particular boom in M&A in the automotive supplier sector, which has come under severe pressure.
But despite all the euphoria surrounding highly valued corporate takeovers, strategic buyers and financial investors are increasingly exercising their due diligence in M&A transactions from year to year. In due diligence, they will continue to thoroughly examine the target companies for the existence of any risks and obligations. To hedge against risks, they will try to enforce extensive warranties and indemnities in the purchase agreements. The instrument of warranty and indemnity (W&I) insurance will gain in importance, not only if the seller is a financial investor, but also a private owner or a family business. Securing seller warranties is now part of the standard practice, and the proportion of insured transactions continues to increase.
10 Theses on the German M&A Market 2022
- Strategic deals gain of importance and defensive deals continue to decrease
- Attractiveness of companies for sale increases
- Valuation multiples remain at high level (“asset inflation”)
- Mid cap segment very active; large cap deals > Euro 1 billion are the exception
- All sectors will be affected by M&A
- Share of cross-border deals will increase from currently approximately 60% to 70%
- Most important buyer and target nation for German companies to invest remains the U.S.
- Share of private equity on the buyer side continues to rise (> 33%!)
- Corporate divestments at DAX and MDAX companies increase
- Number of deals with German targets will further exceed the high level of 2021