Despite uncertainty around the federal election coming on September 24, there is a healthy appetite for German assets. Germany saw its highest quarterly M&A value on record in Q2, climbing to US$63.2 billion in the three months to the end of June. M&A activity was buoyed by continued economic growth (in its June economic forecast, the OECD projected “solid” GDP growth of 2.3% for the year and a further decline in unemployment).
Large deals to the fore
Although the spike in deal value is largely attributed to the US$45.5 billion agreement to merge Germany’s Linde and US-based Praxair to create one of the world’s biggest industrial gas businesses, there were a number of other notable large deals targeting German firms during the quarter. These included US-based agricultural machinery company Deere & Co.’s US$5.2 billion agreement to acquire Wirtgen Group, US-based PerkinElmer’s planned US$1.3 billion takeover of EUROIMMUN Medical Laboratory Diagnostics and Chinese Creat Group’s US$1.3 billion deal to acquire blood plasma company Biotest.
The prevalence of these major deals involving German companies suggests that international players are shrugging off market uncertainty caused by upcoming elections in the country. Polls suggest that current chancellor Angela Merkel and her Christian Democratic Union party will remain in power through the formation of a coalition, bringing continued political stability. Recent elections in France, the Netherlands and Austria have also served to increase investor confidence as voters largely rejected the more extreme populist movements.
Industrial deals top the charts
With 54 deals valued at US$53.8 billion, the industrials and chemicals sector remains the stalwart of M&A activity and is attracting a high degree of international and private equity (PE) interest.
The Praxair-Linde tie-up accounted for the lion’s share of value, followed by Deere & Company’s acquisition of Wirtgen. But other, smaller deals reflect continued PE activity in the sector, including HgCapital’s agreement to sell meter reading systems business QUNDIS to German meter installation company Kalorimeta for a reported US$436 million, and Deutsche Beteiligungs’ agreement to sell food machinery manufacturer ProXES to Swissfirm Capvis Equity Partners for an undisclosed sum.
This activity is supported by Germany’s state-backed Industrie 4.0 initiative, a drive to push the country’s manufacturing businesses to the forefront of automation and digital innovation. Spearheaded by Germany’s industrial giants, the project looks set to spur further M&A deals as companies seek access to innovative technology.
A gateway to Europe
With Brexit looming in the UK—historically Europe’s most active market—the relatively high number of deals with German targets suggests that overseas buyers may be looking to Germany for exposure and access to European markets instead.
There were 28 inbound acquisitions by US companies announced in Q2 2017, up from 25 in the previous quarter and 26 in Q2 2016, suggesting that upcoming elections have done little to dampen appetite for German assets. This contrasts with falling value and volume figures for US acquirers investing into the UK over the same period, despite a substantially weakened sterling. Indeed, part of Praxair’s rationale to agree to the merger with Linde was the latter’s strong presence in Europe and Asia.
And it’s not just US buyers that are eyeing the German market. Despite outbound Chinese deals falling towards the end of 2016 following moves by the country’s government to tighten capital outflows, Germany saw a rebound in activity from Chinese buyers in Q2. Deal value jumped from just US$350 million to US$2.25 billion between the first and second quarter, and volume doubled from four to eight transactions. While value was boosted by Creat’s acquisition of Biotest, other notable deals in the period included Chinese tech firm Truking’s US$109 million agreement to acquire pharmaceuticals packaging group Romaco Group and Beijing BDStar Navigation’s US$90 million agreement to acquire a majority stake in in-tech GmbH, an automotive electronics firm.
This activity came before the German government’s announcement over the summer of its increased power to block non-EU acquisitions of strategically important assets. The move followed perceived concerns in the press surrounding, among others, China-based Midea’s US$4 billion agreement to acquire German robot manufacturer Kuka announced last year. (Despite concern expressed in the German press, the Midea/Kuka deal was ultimately cleared.) The German government and media have expressed fear of Germany’s more sensitive sectors being targeted by overseas acquirers. The government’s new veto powers could lead to Chinese, and potentially even US, inbound acquisition numbers falling in the coming quarters.
Full steam ahead
With Germany’s economy on a solid growth trajectory, and Brexit continuing to cause uncertainty around the UK’s trading status, Germany remains an attractive M&A destination for overseas acquirers. A report from professional services firm EY, published in January, found that foreign investors see Germany as Europe’s most popular alternative to the UK for deploying their capital, with France and The Netherlands in distant second and third positions.
While activity may be slightly dampened by increased scrutiny of non-EU investment into Germany, the country’s strong industrial base and the focus on embracing technological change means that Germany will likely continue to see robust M&A activity for the rest of the year.