German M&A market continues at a high level in 2018
Antitrust authorities intervene massively — USA remains attractive- Chinese investors have a hard time
Frankfurt — The M&A market got off to a buoyant start in the first quarter of 2018. The unchanged good economic conditions, favorable debt capital and a market with attractive takeover targets ensure dynamic transaction activity that is unaffected by political and regulatory difficulties. This applies in particular to transactions with German participation on the buyer, seller or target company side. Despite a slightly lower number of 550 deals compared with the first quarter of the previous year, the transaction volume for deals with German participation rose to US$82.8 billion. Thus, the market continues to move at a remarkably high level, according to the results of the latest M&A Insights by Allen & Overy.
Deal drivers are primarily digitization and automation, which as major technological trends ensure that IT companies are very active on the buy side. At the same time, however, companies in this sector are becoming attractive targets for strategic investors, who are thus expanding their product and technology portfolios. In addition, as in previous years, the pharmaceutical and healthcare sectors as well as industrial services and telecommunications are very active. There is also movement again in the banking sector, where there have been few transactions in the recent past, not least because of the acquisition of HSH Nordbank by a group of independent investors led by U.S. financial investors Cerberus and J.C. Flowers for EUR 1 billion.
From a German perspective, the intended break-up of Innogy was undoubtedly a highlight of M&A activity. RWE and E.ON, Germany’s two largest energy utilities, have agreed to split the former Innogy businesses between them. The deal volume here amounts to 37.86 billion US dollars.
Another bang for the buck in the first quarter: Geely’s investment in Daimler AG with a transaction value of US$8.95 billion.
Antitrust authorities cause M&A deals to fail
The impression that antitrust authorities are intervening massively in M&A activity has recently been reinforced once again. Particularly in areas where market shares are too high across all sectors, planned transactions are sometimes subject to drastic restrictions or even fall through altogether in the end. The most prominent recent example is certainly the failed takeover of Air Berlin subsidiary Niki by Lufthansa. This trend is also borne out by figures: According to an Allen & Overy survey of merger control practices in 26 jurisdictions, 38 deals failed due to regulatory vetoes in 2017 alone.
“Transactions are getting bigger, but in certain markets the number of competitors is getting smaller. Where antitrust authorities intervene, however, they feed further M&A activity,” says M&A partner Dr. Hartmut Krause (photo). For example, Bayer has to make a number of divestments in order to complete the Monsanto deal. The Linde/Praxair merger is also subject to strict conditions imposed by the antitrust authorities.
More difficult conditions for Chinese investors
After 2016, the record year for Chinese corporate acquisitions in Germany, Chinese M&A activity has declined somewhat since 2017. As a result, there were only a few, rather small transactions in the first quarter of this year. Hartmut Krause explains the reasons: “On the one hand, the Chinese government issued regulations some time ago to prevent further capital flight abroad. On the other hand, legal hurdles pose difficulties for Chinese investors. Not least because of the tightening of foreign trade regulations, the Chinese are currently acting more cautiously on the German M&A market.”
Nevertheless, experts continue to expect Chinese investors to be involved in significant transactions in 2018. “China is striving for global technology leadership. The technology required for this is to be purchased worldwide — including in Germany. Technology and production companies in particular therefore remain at the top of the list of priorities for Chinese investors. In banking and finance, on the other hand, they lack experience and do not get a chance in this area,” says expert Krause.
USA remains attractive
Although the USA still prohibits transactions with Chinese acquirers, the situation has developed rather positively under President Donald Trump with regard to German acquisitions. The USA will become an even more attractive location for companies from Europe and thus also from Germany as a result of the tax reform. But the tax burden will also fall for US companies investing in Europe, because profits generated there will no longer be subject to subsequent taxation.
“The controversial political developments under President Trump are hardly affecting M&A activity with the U.S.,” observes Krause. Across the U.S., he said, companies are doing well. And further: “It remains to be seen whether and to what extent U.S. tax reform will actually put U.S. companies in a better position than their foreign competitors when it comes to M&A transactions. Clearly, medium- and long-term strategic business objectives are stronger drivers of M&A transactions than current political debates.”
Hartmut Krause is optimistic about the further course of the German M&A year: “Neither Donald Trump’s US policy nor the approaching Brexit are having a negative impact on M&A activity in Germany. Debt capital is still cheap and financial investors continue to have high levels of liquid funds at their disposal. The market could also deal with the consequences of an interest rate turnaround. The lights on the German M&A market therefore remain green.”