German M&A market poised for take-off
The German market for mergers and acquisitions (M&A) looks set to burst into life, with an increase in deal activity expected.
Corporate transaction managers are flush with cash and coming under growing pressure to invest, but also face tougher competition from the private equity camp.
These are the key findings of the latest survey of the M&A panel polled now for the tenth time by CMS Hasche Sigle and FINANCE magazine. The heads of the M&A departments at German companies plus leading investment bankers and M&A consultants provide anonymous assessments of the market for the survey.
Following the restrained outlook at the end of 2013, hopes are now rising of more M&A activity. Respondents regard accelerating growth and expansion into new markets as the most important drivers; both factors were also considered important in previous surveys, but failed to generate many transactions. The current more stable deal environment could change that – at no time since the panel was formed at the start of 2011 has the economic situation received such a low rating from both groups as a potential deal-breaker.
The strong cash position of many companies also points to an upsurge in the German M&A market. Brimful coffers are exerting pressure on some large companies to invest. While the current popularity of share buy-back programmes is waning in many quarters due to the sharp rise in stock prices, surplus cash could increasingly be used for M&A projects in the coming months. Conventional bank loans are becoming less important in this situation. Although the M&A chiefs who took part in the survey believe this form of acquisition financing is relatively cheap and easy to obtain, it is rated much lower than before.
"Despite their comfortable position, companies are scrutinising potential takeover candidates much more closely than in the previous boom period. This is partly due to high-profile court proceedings against directors after failed takeovers," says Thomas Meyding, a partner at CMS Hasche Sigle.
Strategists will hardly be able to translate this financial firepower into bargain acquisitions, however, because competition from the private equity camp is hotting up. As shown by the latest private equity panel survey by CMS Hasche Sigle and FINANCE, private equity investors consider the finance environment and availability of buy-out loans to be much better than in the previous year. The survey of investment bankers and consultants for the M&A panel confirms this. The financial strength of corporates and private equity investors is roughly equal for the first time since June 2011, with private equity investors having jumped to the highest level ever recorded. Bankers, consultants and corporate representatives also regard the edge held by strategic investors in the competition for takeover candidates as the smallest ever.
"This trend has long been apparent in the market. We’ve been seeing private equity investors becoming more competitive again compared to strategic investors for some time now," says Oliver Wolfgramm, partner at CMS Hasche Sigle.
Private equity firms are mentioned most often when respondents are asked about increased M&A activity: around 88 per cent of the bankers and consultants surveyed expect PE investors to be more active in the M&A market this year. Major corporations in particular are also forecast to increase their activity levels, and more transactions are expected between private equity firms in the years ahead. Bankers and consultants rank reselling to a second or third private equity investor as the second most active M&A segment in 2014, after cross-border transactions.
"Even in the final quarter of last year, we saw a significant rise in activity among private equity investors. This trend is evidently continuing in the first quarter of 2014. The number of attractive targets up for sale nevertheless remains a limiting factor in 2014. This is one of the reasons that companies already owned by private equity investors will continue to play a major role for other private equity investors," says Wolfgramm.
There is a risk that increasing competition will put a brake on the emerging upturn, however. Bankers, consultants and corporate M&A chiefs already believe that excessive prices are being paid in many sectors. They also still see diverging price expectations as the main reason for failed transactions.
"The time when you could pick up a bargain is over. Strategic investors are nevertheless willing to pay an appropriate purchase price, with the improvement in financing conditions definitely acting as a contributing factor," says Meyding.
Emerging markets are likely to play less of a role in cross-border transactions than has been the case recently. Respondents now have less confidence in corporate purchasers from emerging markets, presumably influenced by the current crisis in some emerging countries. Similarly, fewer respondents agreed with the statement that these countries offer attractive buying opportunities. However, this bout of weakness in emerging countries is not likely to impact significantly on M&A activity in the German market. Bankers and consultants are very positive about the future and have a clearer expectation than ever before that the deal situation will improve in the next 12 months.
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