Frankfurt After a record 2021, the mergers and acquisitions (M&A) market has plummeted this year. In 2022, the German M&A business shrank by 36 percent to its lowest level since 2017.
Observers do not expect a noticeable revival until the second half of 2023. For the first time in a long time, companies could have an advantage over financial investors.
Industry experts also expect more medium-sized takeovers and fewer mega deals. In addition, buyers will focus more on profitability, sustainability and transatlantic deals.
Activist investors like hedge funds remain a driver of takeover business. “The pipeline of M&A ideas is bulging. The question is when to implement it. When will the price differences be overcome and the financing markets back?” says Michele Iozzolino, head of investment banking in Germany at JP Morgan.
Like all his colleagues, he hopes that 2022 will be over and that business will gradually pick up again. Six trends that are likely to shape the M&A market in the coming year:
1. Companies currently have an advantage over financial investors
While private equity investors have claimed ever larger shares of the M&A market for themselves in recent years, 2023 could be the year of takeovers by companies with good credit ratings. Financial investors are currently finding it difficult to raise money to buy companies because the markets for high-yield debt capital (leveraged finance) are closed. On the other hand, companies with investment grade ratings continue to receive credit easily.
“For companies with an investment grade rating, the current phase can be a good time for acquisitions, provided they can assess the operational development of the respective business well despite the macro-economic uncertainty,” says Julian Schoof, head of investment banking at Deutsche Bank in German-speaking countries .
Jens Kengelbach, who heads global M&A at Boston Consulting Group, cites one reason why firms should act now: “Historically, downturn deals have outperformed boom deal deals by about two years later in return ten percent. Now is the time to use and buy your dry powder.”
2. Medium-sized deals instead of mega acquisitions
The era of deals in the tens of billions will be replaced by a phase with medium-sized transactions. “The really big boom in the M&A business has come to an end for the time being because the board members in the companies are currently struggling with a lot of uncertainty.
“Hardly any executive board wants to carry out a large takeover with a complex integration,” says Dirk Albersmeier, co-head of global M&A business at US bank JP Morgan. Most of the transactions currently have a volume of 500 million to two billion euros.
For such deals, it is also easier to get financing from banks and/or private credit funds. There are some companies that are strategically restructuring and expanding their portfolio and want to buy them in 2023, says Kai Tschöke, co-head of investment banking at Rothschild in German-speaking countries.
Rothschild is a leader in mid-sized deals. “This affects very different industries, so that, as in 2022, we see mergers and acquisitions more broadly than in selected industries. Even if the topic of energy will certainly play a role in many deals,” says Tschöke.
3. M&A for profitability instead of growth
In recent years, buyers have often focused on the growth rate of their takeover targets. But with the prospect of a recession, the focus shifts.
“A year ago there was a premium for high growth, now there is a premium for profitability,” says Christopher Droege, co-head of M&A in Germany and Austria at the US investment bank Goldman Sachs. Companies focused on their core business.
Shareholders are currently skeptical about company acquisitions where the complexity increases or the level of debt increases substantially. Topics such as digitization remain at the top of the list of desired goals, as they can often increase profitability.
“Regardless of the continued challenging market environment, we are looking positively to the M&A year 2023. Industrial companies are under great pressure to transform and strategic M&A transactions such as in the area of digitization or acquisitions with high synergy potential offer them an answer to this,” says Anselm Raddatz, Partner at of the law firm Clifford Chance.
4. Transatlantic acquisitions
Many investment bankers expect that the M&A business between the USA and Germany could experience a renaissance. After the China euphoria has evaporated, takeover targets in the USA move into the sights of German companies. “From a macro perspective, the US is more attractive than Europe, so we will see more acquisitions by European companies in the US,” says Tibor Kossa, also co-head of M&A for Germany and Austria at Goldman Sachs.
In the USA, the growth opportunities are currently better than in Europe, not least because of the access to cheap energy. The Americans, on the other hand, are currently reluctant to make large acquisitions in Europe and Germany because they were primarily deterred by the uncertain geopolitical situation and high energy costs.
However, transatlantic deals have not necessarily become easier of late, says Martin Neuhaus, co-head of corporate practice at Noerr. “When it comes to country risk in the USA, the difficult-to-predict official decisions on antitrust law (FTC, DOJ) and investment control (CFIUS) are a key point. The situation could worsen with the National Critical Capability Defense Act.” Mergers and takeovers are increasingly being viewed with reservations because companies fear the long, time-consuming procedures with an uncertain outcome.
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5. Activists with a new focus
Activist shareholders—usually hedge funds—will continue to hold boards in suspense in 2023. “The activists have changed their strategy. The focus is no longer on ‘corporate clarity’, ie the sale of peripheral areas to avoid conglomerates.
Today, considerations of ‘capital allocation’ dominate, i.e. how the capital is used in the group,” says Albersmeier from JP Morgan. Executives have to show that M&A is more profitable than, for example, buying back shares or reducing debt.
The consulting firm Alvarez & Marsal (A&M) has identified 29 German companies that are threatened with attacks by activist investors in the next 18 months. Most recently, campaigns at Fresenius, Teamviewer or the Austrian utility EVN made the headlines.
6. ESG will drive transactions
The Ukraine war caused an abrupt slump in M&A activity in almost all sectors in the spring. An exception were companies with which buyers could improve their sustainability profile. Takeovers with a focus on ecological and social compatibility as well as good corporate governance, abbreviated to the three letters ESG, continued to work.
“Overall, we are observing a great appetite among investors for sustainable business models and enablers of sustainability,” reports Lucina Berger, partner at the law firm Hengeler Mueller in Frankfurt. In addition to classic investments in renewable energies, for example, green tech is very popular – whether agricultural technology, recycling or sustainable mobility.
“In light of the energy crisis, numerous companies are looking for independence and are acquiring the necessary expertise for the sustainable restructuring of their own business models through acquisitions.” At the same time, buyers spent a lot of time examining the ESG profile of a takeover target.
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