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M&A market in Germany remains positive and stable

The mergers and acquisitions sector in Germany is currently looking forward to a year of stable development from what is now a comparatively healthy base level. 

Previous concerns about a potential economic slow-down have abated in recent months. Alongside the leading M&A consulting firms and investment banks, small-cap advisors are also enjoying higher workloads. There are, however, increasing legal hurdles for corporate buyers during M&A transactions. Those are the key findings of the latest M&A panel survey by CMS Germany and FINANCE magazine. The panel, consisting of M&A department heads at German companies as well as leading investment bankers and M&A consultants, provides an anonymous assessment of market conditions.

Following on from the rather subdued mood last autumn, the M&A market has stabilised over the winter. Sentiment may not yet be as positive as it was in early 2014, but the market is now building from a higher base level due to increased deal activity. Responding to the survey, many corporate M&A managers agreed with the statement that the deal environment will improve over the next twelve months (score: 5.35 out of 10). Investment bankers and consultancies were in even greater agreement, with a score of 6.15. “We are currently experiencing a high level of M&A activity, especially on complex and international M&A projects. As expected, geopolitical developments are having a greater impact on transactions in conflict areas than in the market in general,” said CMS partner Dr Thomas Meyding. “People are now much more relaxed about the macroeconomic climate.” The importance of that climate as a deal-breaking factor has now reduced by 15% among investment bankers and 13% among company managers compared with last autumn.

There are, however, a number of other potential deal breakers that are gaining in significance. While the panellists still consider diverging price expectations to be their primary concern, the attractiveness of target companies is one issue that has grown significantly and currently occupies second place. According to corporate M&A bosses, the potential deal-breaking effect of negative due diligence findings is higher than ever before. 

“The trend towards more intensive due diligence, focusing on industry-specific risks, is very much still in place. On the one hand, we have high valuations and purchase prices, and on the other, the need to identify all risks in the course of due diligence and implement contractual safeguards in the form of guarantees and exemptions – these are communicating vessels,” explains Dr Oliver Wolfgramm, partner at CMS Germany. 

Another growing concern, albeit at a lower level, are the legal aspects of M&A deals. In the assessment of company managers, disagreement over contract design has risen by more than eight per cent, while objections from regulators are roughly seven per cent higher. Since transactions are less secure, companies are allocating greater resources in their 2015 budgets for identifying target companies and completing post-merger integration.

The actual financing of M&A deals remains a minor hurdle for corporate buyers. Potential issues such as expensive bank loans and difficult negotiations are at their lowest levels since the survey was launched in 2011. The importance of bonds as a financing instrument is continuing to grow. The advantage that strategic investors once had over private equity investors has now almost entirely disappeared. While the panel’s investment bankers and M&A consultants consider the funding environment for corporates to be extremely good, the conditions for PE investors are now approaching a comparable level.

In the M&A advisory market, we are seeing a shift in emphasis as the major players appear to have completed a number of pipeline transactions over the winter. According to the forecast indicator, there are few concerns regarding current workload, which is still rated as higher than average. Small-cap advisors have closed the gap slightly on their mid/large-cap colleagues, but still lag far behind. Among the major players, the high workload levels reported last autumn have fallen slightly. As before, the majority of consulting firms expect a continuation of above-average project pipelines going forward.

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