Private equity aims to end M&A slump
The global volume of mergers and acquisitions (M&A) has plummeted by 34% this year compared to the same period last year. As of mid-September, the volume in the German M&A market stands at 53 billion dollars, about half of the previous years total, even though three-quarters of the year have passed. This is according to data compiled by Morgan Stanley. "The large transactions are notably absent, and the number of deals has also decreased", observes Jens Maurer, Co-Head of Investment Banking at Morgan Stanley in Germany.
Difficult to reach the finish line
Nevertheless, investment bankers foresee a speedy end to the M&A slump in large transactions. "The level of activity is very, very high", says Sebastian Bladt, Germany's M&A chief at J.P. Morgan, to Börsen-Zeitung. "Many mandates are currently being put up for bidding." However, it has become more challenging in 2023 to successfully complete transactions.
The largest transactions in the third quarter only ranked sixth to eighth in the "League Tables": the 2.8 billion dollars sale of the Essen-based energy company Steag to Spanish financial investor Asterion, the 2.6 billion dollars sale of French biotech firm Polyplus to medical technology company Sartorius, and the 2.5 billion dollars acquisition of Software AG by financial investor Silver Lake.
Despite increased interest rates for bonds and loans, M&A remains financially viable. "The market for investment-grade financing is still intact, and the market for larger leveraged buyout financing is much more constructive than last year", notes J.P. Morgan banker Bladt. However, it's not sufficient for massive deals: "In general, we see increased activity in the size range of 1 billion to 2 billion euros for M&A transactions." The only exception was the sale of the heating technology division of the Viessmann family's eponymous company to U.S. firm Carrier Global for 12 billion euros.
So far, 2023 has been more of a buyer's market. "Many sellers are still exercising caution because the valuation levels of the 2021 boom year have not yet been reached", believes Bladt. "In addition, the regulatory environment has become more complex, especially for cross-border deals in industries classified as critical infrastructure." This has expanded the average time between announcement and completion of a transaction and has also increased the so-called closing risk.
The present situation plays into the hands of financial investors, who usually offer high transaction security and a fast completion of the deal. "The investment pressure on financial investors is immensely high due to an estimated worldwide dry powder of more than 2 trillion dollars", explains Bladt. The pressure from uninvested capital is strongest at Clayton Dubilier & Rice (44.6 billion dollars), KKR (40.4 billion dollars), and Apollo (40.1 billion dollars).
"Due to the lower number of auctions in the current market, most potential buyers are proactively approaching ptential sellers.But in recent months, we have also seen increasing considerations of exits by financial investors", analyzes Bladt. Most of them prefer a complete sale over an IPO. Some companies up for sale include pharmaceutical manufacturer Stada, owned by Bain and Cinven, and heating cost allocation firm Techem, owned by Swiss Partners Group.
"Private equity will significantly contribute to the revival of the M&A market towards the end of the year, especially in the mid-cap sector and in crisis-resistant sectors," illustrates Christoph Thiermann, a partner at the law firm Noerr. "Acquisition financing remains a challenge and is more expensive than before the crisis, but debt funds and banking consortia are increasingly willing to provide financing for transactions." While private equity has been using continuation funds as an exit option for some time, they only offer a real alternative to exiting on the M&A market in specific scenarios. Bank of America also anticipates an end to the slump. "There obviously still are significant macroeconomic uncertainties, but we see increasing confidence among buyers", says Armin von Falkenheyn, CEO of Bank of America Germany.
