M&A – recent trends in the German market

November 2023 | SPOTLIGHT | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

November 2023 Issue

The M&A market in 2023 has frequently been described as soft, or even weak. The geopolitical situation and the resulting macroeconomic impact have left their traces everywhere in the world. Deal numbers and transaction volumes are down. Nevertheless, there is still M&A activity in the market and transactions are being carried out. The German M&A market displays trends that can be found all over Europe, as well as in other regions of the world.

Time for strategic transactions

For years, strategic investors were priced out of competitive auctions. Often, not only did they not even land in second place, but they did not qualify for the negotiation round at all. With the costs of financing having become a big challenge for financial investors, now is the time for strategic M&A. Fostered by the need to run a less energy-consuming and more environmentally friendly business, and with nearshoring and supply chain management arising as new drivers, strategic investors are turning to M&A, both on the buy- and sell-side. Political programmes aiming to transform whole sectors are fuelling these developments.

The €12bn sale of the family-owned Viessmann heating business to Carrier falls into this category. The owners are convinced that only in combination with the listed US competitor will their business be able to play a leading role in the transformation of residential heating as envisaged by the German government. The owner-managers, descendants of the Viessmann founders, remain involved in the business. As part of the purchase price, they took a stake in Carrier and will have a seat on their board. A transaction of this kind could hardly be orchestrated by private equity (PE) – and the long-term perspective, clout and resources of a strategic investor allow for a double digit transaction even under current market conditions.

PE is waiting in the wings

In the meantime, financial investors are looking for opportunities that can be realised in an environment dominated by high interest rates. As a consequence, PE exits are seen more often than acquisitions by financial investors. In the past, secondaries were a significant element of the PE exit strategy. They have fallen away, so trade sales have become more cumbersome. Besides strategic investors, family offices are starting to fill part of the gap left by the absence of secondaries, as seen in EQT handing over Schülke & Mayr to the Strüngmann and Bitburger family offices only three years after it initially acquired the disinfectant manufacturer.

The return of confidence in capital markets has turned initial public offerings (IPOs) into an exit option again. However, so far mainly old shares are to be sold. The lack of a capital increase element does not necessarily add to the equity story told at roadshows, and with such IPOs allowing for partial exits only, they remain second choice.

In their search for the best use of committed funds, financial investors are becoming more creative. One of their recent discoveries constitutes taking over target companies that they already owned and subjected to an IPO not long before. The investors know these targets better than others do and they often still hold significant stakes. In cases where the market undervalues such companies, a second takeover appears attractive. For instance, EQT has just announced its intention to take over enterprise software developer Suse, which it listed in 2021. Reportedly, Cinven is pursuing comparable plans at Synlab. Whether such a strategy burns the market for a subsequent second IPO exit remains to be seen.

Activists have staying power

Following the coronavirus (COVID-19)-induced interruption, activist shareholders are again playing the role of catalyst for M&A activity. Often, the ‘pure play’ argument they made for years is now combined with their pushing for the separation from energy-intense or environmentally unfriendly parts of the business. In many cases, this resonates with management who are facing increasing scrutiny from stakeholders and the public in general.

The long-term approach and persistency that activists have been applying recently is a new development. At Brenntag, Primestone blocked the chemical solutions provider’s planned takeover of US competitor Univar. The activist shareholder argued that the deal would destroy value and requested that Brenntag instead implement a share repurchase programme, while focusing on its core business. Finally, the deal was called off. Primestone then began pushing for the separation of the company’s two business divisions. Their attempt to get representatives elected to Brenntag’s supervisory board was supported by proxy advisers ISS and Glass Lewis: the first time proxy advisers supported an activist campaign of this kind in Germany. The attempt only failed by a narrow margin. But, as a consequence, Brenntag’s management is now pursuing the division of the business into segments, thus taking the first step toward the split of the company pushed for by the activist.

Industrial policy enters a new dimension

Fuelled by the COVID-19 pandemic and aggravated further by geopolitical tensions resulting from the war in Ukraine, existing protectionist tendencies have translated into strict foreign direct investment regimes, on a national as well as European Union (EU) level. Governments that, in the past, had refrained from applying an active industrial policy approach have turned into market participants.

In Germany, a country that for decades relied on foreign investment and was known for its liberal investment climate, the foreign direct investment regime was tightened several times. It is now perceived as one of the stricter regimes in the EU. Other EU member states have also tightened their investment controls, and countries that did not have a control regime in the past have now introduced corresponding laws. At the EU level, the Foreign Subsidies Regulation has come into force, adding further regulatory hurdles on the road toward successfully completing M&A transactions within a workable timeframe.

In sectors like defence and critical infrastructure, the German state is now making itself into a player on the M&A market. In the energy sector, for example, the German government is not only exploring the acquisition of the German subsidiary of Dutch grid operator TenneT, but is already considering passing on a majority stake to safe hands in the time following such acquisition. Even a country like Germany that does not have a history of active industrial policy is now orchestrating complex multi-billion euro transactions. Other EU member states that do have such a history are heavily expanding on this tradition.

Where does this leave the M&A market on its way toward 2024? Over the past decade and a half, market participants have encountered a whole host of crises. Starting with Lehman, followed by the financial crisis, the COVID-19 pandemic, and up to the war in Ukraine, resulting inflation and rises of energy costs and interest rates, market participants have been subject to the ever-increasing impact of external pressures. They have adapted to this environment and developed a previously unseen level of resilience.

Following the Lehman crisis, it took quite a while for market participants to overcome the state of paralysis. Now, each new blow is taken without the players feeling the need to stop. Nobody wants to keep their feet still again, waiting for the skies to clear. Crisis is the new normal and it needs to be managed. Creativity is more valuable than ever, so deals can be discovered, structured and financed. Yes, the current M&A market has its challenges – probably more so than in the past – but it also comes with rewards that are not less attractive than they were in the past. These are for the most entrepreneurial to grab.

Michael J. Ulmer is a partner at Cleary Gottlieb Steen & Hamilton LLP. He can be contacted on +49 69 97103 180 or by email: mulmer@cgsh.com.

Michael J. Ulmer

Cleary Gottlieb Steen & Hamilton LLP