Dual track approach squeezes out best price in M&A market
Around the world, hopes of lower interest rates and economic recovery have revitalised the M&A market. Only Germany is still in a slump. That at least applies to the first half of the year, with a 56% drop in volume due to a lack of major mega deals. This could change soon if the generic drugs group Stada and the plastics manufacturer Covestro change hands as anticipated.
In the private equity sector in particular, there are many indications that deals are making a comeback. The financial investors are sitting on several trillion dollars in capital commitments from their institutional investors – known in industry jargon as „limited partners“. They will have to invest this money if they do not want to be accused of charging high fees for doing nothing. Exits from company investments have also become a rarity, because buyers and sellers are finding it harder to agree on the price in view of the rise in interest rates. However, investors are becoming restless. The pressure to return their money is becoming so strong that for many private equity firms it is a matter of survival, as without exits they will no longer receive any money from new fundraising.
Exerting pressure in price negotiations
A dual-track approach is a proven method for sellers of companies to exert pressure in price negotiations. If you offer too little, I'd rather take the company public. And vice versa – if the fund managers are likely to offer too little for the shares in an IPO, then you switch to a trade sale.
We have seen both in recent weeks. Just a few days after wheelchair manufacturer Sunrise Medical announced its „intention to float“, Nordic Capital decided to sell to investment firm Platinum Equity. Meanwhile Stada currently looks likely to be sold to Clayton Dubilier & Rice, although an IPO was being worked on beforehand. Permira, on the other hand, is assiduously steering the Golden Goose sneaker brand towards the stock exchange.
In the past, this dual-track process was sometimes only used as a backdrop to threaten a move that the seller was not really prepared to make. Companies go where the highest price can be achieved with the highest transaction security. That is a good thing. And it contributes to an environment where deal activity is once again picking up in Germany.
