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published on 26 July 2022 | reading time approx. 4 minutes
The past two years have been – and are still continuing to be – overshadowed by the coronavirus pandemic and current political developments. It is worth taking a look at the impact these factors have left on the M&A market. This article addresses current trends in the M&A market that we consider to be fundamental, based on observations from our advisory work as well as from talking to our clients and colleagues – thankfully again more and more by direct personal interaction.
As in all other sectors of the economy, digital tools have also made their way into the world of M&A transactions. The speed of digitalisation in the economy has accelerated significantly again in the past two years and is progressing relentlessly. A good example is the emergence of digital tools for so-called deal sourcing, which simplifies the M&A process for advisors and investors. Deal sourcing offers technology-based M&A solutions for sale side advisors and buyers. On the one hand, M&A advisors use this tool to identify buyers and approach the market; on the other hand, investors gain access to a comprehensive deal flow for relevant projects.
Such data-driven approaches can help identifying buyers and understanding which strategy they pursue, especially to reduce the drop-out rate after initial expression of interest. Constantly improving software solutions for drafting of and content extraction from contracts as part of due diligence are also shaping the work in M&A transactions. Reviews can often be carried out much faster and in some cases with better results, which in turn saves costs.
However, digitalisation is not a sure-fire success. To be successful in this area, high investments are required on the one hand. On the other hand, meeting the challenges, seizing opportunities and addressing risks of digitalisation requires awareness and commitment to Change Management on the part of all stakeholders.
The year 2020 and the preceding years trended towards a stabilisation of the sell-side market. After the initial slowdown caused by the COVID-19 pandemic, we observed a significant increase in M&A transactions in the German but also the international M&A market in 2021. This trend is confirmed by an overall 320 transactions in which Rödl & Partner provided support in the 2021 financial year. This shows that Rödl & Partner not only continued the trend of high transaction numbers from the pre-pandemic period, but even surpassed its so far most successful year of 2019 (with 313 transactions at that time). The first quarter of 2022 started well. All market participants were also very confident about the entire year 2022. This trend is fuelled on the one hand by more than 200,000 companies that are faced with the challenge of solving succession issues in the short and medium term, and on the other hand by many investors – both strategic and above all private equity investors – having high liquidity or capital commitments.
For the first time in years, it can be observed that the sector focus has shifted, although the companies in the traditional industrial sectors remained the undisputed number 1 in 2021. Winners were companies from the health industry, the IT and software segment, the energy sector as well as numerous service sectors. On the other hand, automotive suppliers in particular were among the “losers” of the year 2021, due to unfavourable developments in this sector in terms of upcoming disruption and supply chain problems.
The COVID-19 pandemic and the Ukraine war are not the only events exerting an impact on the M&A market. Also governments increasingly influence the market. For example, regulators, by introducing new regulatory tools, are trying to prevent the sale and outflow of essential know-how. In recent years, there has been a clear trend towards increased government regulation at various levels. This is due to the shift away from liberal global trade policies.
The German Foreign Trade and Payments Ordinance (AWV) aims to eliminate security risks which may arise in individual cases when German domestic companies are taken over by foreign buyers. At the end of 2020, the regulations of the AWV were considerably tightened. As a result, a cross-industry investment control scrutinizing the acquisition of German companies by buyers from non-EU/EFTA states was introduced. In addition, the so-called EU Dual-Use Regulation is directly applicable law in Germany and in all other EU Member States. It cannot be ruled out that laws will be further tightened.
Consequently, transactions with (non-EU) foreign investors are subject to further uncertainty.
In the past years, a sellers’ market prevailed, company valuations and thus purchase prices were high and sellers had a strong bargaining position, which was also reflected in the contractual terms. The reasons for this were the increase in liquidity in the market coinciding with increasingly fierce competition for acquisition targets; the EBITDA multiples for transactions involving European mid-sized companies in 2021 were even above the previous years' average.
Valuations are expected to decrease in the face of the economic slowdown, uncertainty about the future course of the war, rising commodity prices as well as supply bottlenecks and supply chain problems. In addition, rising interest rates will make acquisition financing more challenging.
ESG as a manifestation and concretisation of compliance will continue to gain in importance. Sustainability is no longer a “fashionable trend”, but a fundamental requirement for long-term business success. It is not only about reputation and intangible values, but also about measurable tangible success that is reflected in the balance sheet. Companies which ignore ESG factors risk alienating customers, being penalised by politicians and ignored by investors. The topic of sustainability will therefore play an even more important role in the future. It is about the value of the company, i.e. the increase in the value and the achievable purchase price, access to qualified staff, as well as the market position and competitiveness and access to the financing market. In the future, ESG will therefore play a major role also in the selection of targets, the preparation of transactions and in due diligence and contract drafting.
The recent years have shown that so-called megatrends, such as digitalisation or disruption of traditional business models also strongly influence developments on the M&A market. However, given the current political developments, the progression of these trends cannot be predicted with certainty.
Michael Wiehl
Partner
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Dr. Isabel Bauernschmitt
Thomas Fräbel
Jochen Reis
Transaction advisory | Mergers & Acquisitions
