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M&A IN GERMANY
GERMANY remains one of the strongest markets throughout Europe despite ongoing uncertainty across the Eurozone. M&A levels are steady, although deal volume and value have not yet reached the predownturn heights.
Otto Haberstock, M&A and corporate partner at P+P Poellath + Partners discusses whether the profile of investors investing in Germany has changed, the presence of foreign players in the market, and what the future holds for this sector.
HOW HAVE M&A LEVELS IN GERMANY FLUCTUATED OVER THE PAST YEAR?
The transactional practice has been relatively stable throughout 2012. It has, however, not yet reached the levels both in size and number of deals that had been ongoing before the financial crisis. Deal flow might decrease if the Germany economy should lose the momentum it had during the past two years, which was the result of demand from Asian markets to a large extent. Prime real estate assets and portfolios have been popular targets. Prices here are generally on a high level yet they are still not perceived as inflated by most market participants. The market is insofar fuelled partly by banks selling the distressed portfolios they had taken over during the financial crisis in 2008 to 2009.
HOW HAS THE PROFILE OF INVESTORS LEADING M&A DEALS IN GERMANY CHANGED?
The types of investors have generally speaking not changed very much, with traditional corporate players and private equity still playing a large role. Many private equity investments are still being sold on to other private equity investors in secondary (or tertiary, and so on) transactions.
While foreign investors from the US are still predominantly involved in the German M&A scene, a larger number of investors from Russia and Asia have appeared on the scene as regular participants in structured sales procedures. While in the past particularly Asian investors had difficulties taking part in bidding processes within the short time frames given, it appears that a high level of professionalism has been added more recently. For many European sellers, transaction security remains, however, an issue of discussion.
HOW FAR IS THE EUROZONE CRISIS AFFECTING ENTHUSIASM FOR M&A?
The Eurozone crisis has had a number of effects. The most obvious one still lies in the fact that banks still seem to be focused on observing risks in their current portfolios and being reluctant to providing significant levels of leverage. Even for smaller transactions syndication from the beginning is the preferred method which can make the process time consuming and considerably less certain than in times where firm underwritings and certain funds were available more easily. Another observance is that private business owners seem more reluctant to sell and are doubtful whether their value expectations can be met. Also, investment opportunities for value generated in a transaction is not as attractive given the very low level of interest rates that can be achieved.
WHICH SECTORS ARE SEEING THE MAJORITY OF ACTIVITY?
Transactions do happen in a wide variety of industries with a certain focus on classic industrial sectors providing solid asset-based investments, for example, automotive suppliers with a strong and proven technology and established relationships to top OEMs. Also, real estate investments are in demand.
On the other hand of the spectrum, successful internet businesses have attracted large investment on the basis of significant valuations.
HOW FAR ARE THE MITTELSTAND AND MID-CAP AREAS GARNERING THE MOST INTEREST?
With large cap transaction still being difficult on the financing site, the vast majority of all transactions have focused on mid-cap, Mittelstand companies. Deal flow in this segment is relatively robust, both from the side of private equity investors selling off their portfolios as well as family businesses using M&A transaction as an alternative for family succession.
HOW DO YOU FORESEE THE M&A SECTOR DEVELOPING? ARE YOU OPTIMISTICABOUT A HIKE IN ACTIVITY?
Private equity will certainly continue to provide a solid deal flow with funds reaching the end of their investment lifetime and seeking exits. Another type of transactions might arise in new restructuring scenarios where the sale of a division or a separate business might be sought in a consolidating larger corporates. Very recent transactions suggest that banks might come back to the market on a larger scale which would support an increasing number of private equity transactions.
GERMANY AND THE UK HAVE DOMINATED THE EUROPEAN DOMESTIC M&A MARKET THIS YEAR. IS THIS SET TO CONTINUE?
On a European level, M&A transactions will probably reflect the general economic conditions in the various countries with France, the UK and Germany probably playing a major role. Depending on the further development in the southern European countries, governments might choose to increase the efforts on privatization which in turn could well create attractive targets.
HOW FAR ARE ASIAN INVESTORS AFFECTING M&A LEVELS IN GERMANY? WHICHOTHER JURISDICTIONS ARE PROVING RELEVANT?
In the past two to three years Germany has seen a greater than ever level of Asian investors playing a role in sales processes for German businesses. The general observation is that these investors have made great progress in their approach to European style transactions. Approval processes required in certain countries (especially China) have proven to be a major obstacle in the first transactions of such type some years ago. Since then, both the investors and the potential sellers (and their respective advisors) have obtained a high level of experience in order to address these issues and integrate them in the transactional scenario.