Prices for corporate acquisitions have risen sharply in the German M&A market in recent months, with some sectors moving beyond reach of potential buyers. Corporate M&A experts currently see few attractive takeover targets, while consulting firms report full order books.
Those are the key findings of the latest survey of the M&A panel polled three times a year by commercial law firm CMS Germany 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.
M&A experts from companies and investment banks alike believe purchase prices are now excessive in many sectors. Both groups agree that the prices currently being paid are too high – agreement with this proposition has risen sharply since the summer and now stands at its highest level since the survey was launched in March 2011.
In the case of corporates, the level is slightly higher overall, probably because they need to foot the bill themselves and are thus likely to be more price conscious than transaction managers in banks and consulting firms.
The latest private equity panel survey revealed that PE investors are also facing excessive prices and purchase price expectations.
"In a highly competitive market, buyers who act quickly, flexibly and creatively and are ideally able to finance transactions initially purely via equity are at an advantage," says CMS partner Dr Oliver Wolfgramm.
The respondents see divergent price expectations as the most common reason for failed transactions. Bankers rank this deal breaker five per cent higher than in the summer. Corporates also continue to regard it as the key stumbling block, but its importance for them has nonetheless declined by seven per cent. This could indicate that differing price expectations are the reason why company managers are not only losing out in competitive bidding processes, but increasingly also withdrawing from such processes or not participating at all.
"Not all corporates engage in these so-called rat races. Strategic investors nevertheless remain prepared to offer high valuations and pay substantial purchase prices,” says Wolfgramm.
Respondents continue to position their companies strongly on the buyer side but appear to be no longer satisfied with what the market has to offer. The number who see strategically attractive takeover targets in the market is currently 14 per cent down on the summer – the lowest level since the survey began. Hope within companies that the environment for M&A transactions will improve in the next twelve months is likewise in record short supply. By contrast, M&A consulting firms expect business to pick up in the coming months, despite not anticipating any general improvement in the overall deal environment. In particular, consulting firms that focus on mid-cap and large-cap transactions are now much busier, with the traditionally strong year-end activity likely to have played a role in this. Consulting firms are also optimistic about the coming months as far as their order books are concerned.
With regard to the current survey focus on addressing compliance issues in M&A processes, there is evidence that compliance audits are increasingly becoming the norm. More than half of the respondents said that the importance of audits within M&A processes had increased sharply within their companies over the past five years, with a good 30 per cent reporting a slight increase. Compliance warranties, which are used by M&A buyers to safeguard themselves against compliance risks such as bribery or market agreements and price fixing, have gained in importance again over the past year: 52 per cent of respondents consider them important, while 39 per cent regard them as very important.
There has also been a clear improvement in the usability of tools deployed by M&A managers to try and minimise compliance risks identified in the course of post-merger integration – 61 per cent of respondents now rate them as "good".
"We work together with our clients during the due diligence stage to develop solutions for the compliance risks we have identified. This allows us to implement these solutions immediately after the transaction," says Wolfgramm.