War in Ukraine halts boom in M&A business

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Much more serious than these transactions with a direct connection to the war are the effects on the global business with company acquisitions.

(Photo: Bloomberg)

Frankfurt The war in Ukraine is also ending the euphoria among investment bankers in the mergers and acquisitions (M&A) business. According to an analysis by the information service provider Refinitiv, around 350 transactions worth 10.7 billion dollars with Russian participation were pending in mid-March.

Much more serious than these transactions with a direct connection to the war are the effects on the global business with company acquisitions. “With the high volatility in the markets, risk premiums are rising and sellers have to question whether they want to accept the valuation discounts that result,” said Jens Maurer, co-head of investment banking at Morgan Stanley in Germany. “Strategic M&A will continue, but many other deals will have to wait and see given the headwind from geopolitical uncertainty, rising energy prices and looming fears of stagflation.”

In recent years, for example, record-low central bank interest rates have ensured that takeover financing remains cheap. In addition, the coffers of financial investors were bulging, and they carried out more and larger transactions.

But times are changing, the first central banks – in the USA and Great Britain – are raising the key interest rate again and withdrawing liquidity from the market. The European Central Bank is also about to tighten its monetary policy. This also increases the risk awareness of many investors, many of them take cover for the time being.

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“Even before the outbreak of war, the M&A market in Germany and Europe was below the record level of the previous year,” says Joachim Ringer, Head of Investment Banking at Credit Suisse in Germany. However, ongoing transactions can still be completed, especially if they are high-quality companies. The financial investor Cinven has just announced the acquisition of Bayer’s environmental science business for 2.4 billion euros, the largest transaction in Germany so far this year.

>> Read also: How the Ukraine war is affecting the private equity industry

During the corona crisis, there was also a low mood. However, the M&A market recovered quickly as it became apparent that vaccines would be available relatively quickly and central banks secured liquidity in the market with cheap money. Now, as a result of the war in Ukraine, high energy and raw material prices are threatening the economy, the effects on company profits are difficult to assess – and this in turn makes it difficult to determine the valuations of the companies.

“The pipeline is still well filled, and there are also new transactions – opportunistically and strategically driven -” reports Armin von Falkenhayn, Head of Bank of America Germany. “However, in such an environment, the average probability of success decreases.”

Private equity funds are still sitting on a lot of money. In Europe alone, financial investors have 670 billion euros available that they want to spend on company acquisitions. “The share of private equity in the deal volume in Germany was around 27 percent in 2021, and it is likely to increase further this year,” says Elena Naydenova, Head of Business Development in the private equity division at the consulting firm PwC.

It is clear to everyone involved that the dealmakers must avoid creating a connection to Russia in the transactions. Assets in Russia and Ukraine are – not surprisingly – currently the focus of due diligence, i.e. the detailed economic examination. “This includes, for example, whether business relationships of the target company or products have been affected by sanctions or export restrictions have been imposed,” says Christian Atzler, Co-Head M&A/Corporate at the law firm Baker McKenzie Germany.

More: Billion dollar deal for Bayer: Pest control business goes to financial investor

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