Slowing pace: A worker stands next to rotor hubs of wind turbines in a German factory. The country’s industrial production fell unexpectedly in November, the sixth monthly decline in a row. — AFP
A backlog of incomplete deals and an uncertain economic outlook mean German dealmakers are predicting a quiet first quarter (1Q) and a relative fee famine until 2025 in Europe’s biggest economy.
Financial and legal advisers point to a darker macroeconomic outlook for Germany, which saw four deals totalling US$113mil in the first 10 days of 2024, compared with 45 deals worth US$876mil in the same period last year, Dealogic data shows.
Europe too has made a slower start, with 71 deals totalling US$2.2bil, down from 375 worth almost US$9bil in the same period of 2023.
“The economic challenges facing Germany are likely to lead to a quieter 1Q,” said Bernd Egbers, partner at Astera Legal.
He added that private equity funds and companies are likely to be more cautious about making big acquisitions.
In signs of the mounting challenges for Germany, farmers this week staged nationwide protests, coupled with disruptive rail strikes across the country, and corporate insolvencies increasing significantly at the end of 2023.
Spending freeze
Late last year, the German government froze major spending pledges focused on green initiatives and industry after a constitutional court ruling on unused pandemic emergency funds blew a €60bil (US$65bil) hole in its finances.
This hit investor confidence, with business morale worsening in December, according to the Ifo institute. German industrial production also fell unexpectedly in November, the sixth monthly decline in a row.
“Entering 2024 with such low merger and acquisition (M&A) volumes, we do not anticipate so much more activity in the coming year, with a pick-up to take greater effect in 2025,” said Rainer Langel, head of Europe, Middle East and Africa, at Macquarie Capital.
This comes as dealmakers globally had expected a pick-up in activity as conditions improved.
In the United States so far this year, deal value amounted to US$56bil.
This was boosted by activity in the healthcare sector and more than double the amount it saw at the start of 2023 with US$24bil, according to Dealogic data.
Germany led M&A by value for continental Europe in 2023, with US$91bil of transactions, Dealogic data shows.
Decreasing activity
However, that was the lowest since 2015. And last year globally M&A volumes fell to their lowest levels in a decade.
For bankers and other advisers, that all means lower fees.
Net investment banking revenue from M&A in Germany was €159mil in 4Q of 2023, down 95% versus the same period the year prior, Dealogic data shows.
And since the pandemic, transactions have taken longer, leading to longer periods before they close, advisers said.
“While there will be more activity in 2024, the gap between signing and closing a deal takes time, so many of these deals will only be finished in 2025,” said Langel.
Changing fortunes
As ever with M&As, fortunes could change quickly if a series of deals emerges.
Late last year, Adnoc raised a preliminary offer for German chemicals company Covestro, valuing it at €11.3bil (US$12.38bil).
The private equity backers of pharmaceuticals company Stada are preparing for an initial public offering or sale that could value it at €10bil (US$11bil), while Bayer has said it is considering splitting its consumer health or crop science divisions.
Cash-rich private equity firms with deep contact books could be the ones to get M&As going again, some dealmakers said.
“(They) have a history of adapting to changing economic conditions, and based on their experience they are likely to find ways to continue pursuing deals even in a challenging environment,” said Egbers.
Like others, Egbers is confident of a pick-up in deal activity during the second half of the year.
This is if the economy stabilises, inflation slows and interest rates fall. —Reuters
Emma-Victoria Farr writes for Reuters. The views expressed here are the writer’s own.
