GERMANY: An introduction to Corporate/M&A: Mid-Market

Interest Rate Cuts, Deglobalisation, Geopolitical Uncertainty and Recovery

The M&A market started 2024 with some hope, especially after the previous two years – following the all-time transaction high in December 2021 – had seen figures fall back to 2013 levels. However, the causes that led to this had not disappeared: higher and increasingly volatile interest rates, a number of unpredictable geopolitical crises and massive economic weakness in key economies, not least in Germany.

2024 was also full of surprises. The Franco-German EU locomotive has run out of coal now that there is no longer a viable government in either country, and in the USA, which traditionally dominates the M&A market, a new, unpredictable reorientation and thus further uncertainty is ante portas with the change from the Biden to the Trump administration. Added to this is the trend towards deglobalisation and an increasing “US-China confrontation”, combined with new “East-West” and “West-South” conflicts.

On the other hand, last year saw a whole series of spectacular, large and exciting transactions that exploited the entire spectrum of what makes M&A so exciting and which are currently leading to a clearly positive outlook for market participants such as Lincoln International and KPMG.

But first, it makes sense to take a closer look at some of the deals from 2024. Overall, the year was not too bad from a German perspective. There were deals worth billions, such as the sale of DB Schenker to DSV or Techem to Texas Pacific. In addition – a rather rare event in Germany compared to the USA, for example – there was the DAX takeover of Covestro by an investor from Abu Dhabi, Adnoc. Although this has led to discussions about a “national sell-off”, it is ultimately positive for Covestro, as the company is set to become a consolidation platform, which could lead to further investments worth billions in Germany.

The newly formed Viessmann Generations Group has also started to reinvest its proceeds from the 2023 Carrier deal, as exemplified by Gritec and Isoplus. It is noteworthy that these investments can clearly be subsumed under the aspect of sustainability and innovation, which indicates that technology in combination with ecology is an important growth driver. It is also interesting to note that German family businesses are increasingly venturing into collaborations with private equity. The joint venture between Oakley and Merz in the fast-moving consumer goods sector is an example of this. Finally, the state has played a special role, not least in Germany. On the one hand, it was a concern of the traffic light government to liberalise the capital market, promote transactions, IPOs and start-ups in particular, which is what the Zukunftsfinanzierungsgesetze I and II (Future Financing Acts) stand for. Unfortunately, however, these approaches could not be completed.

However, the regulatory framework for M&A transactions in Germany, the EU and beyond has increased significantly. This is particularly evident in the constantly growing importance of foreign trade control, which is not only evident in inbound transactions but also in outbound transactions. Even though a Foreign Trade and Payments regulatory framework is now established almost worldwide, it is also dependent on the political climate and subject to political influence, as it is usually the responsibility of the Ministry of Economic Affairs, as is the case in Germany. In addition, there is the EU Foreign Subsidies Regulation, which has been in force since the end of 2023 and means that more and more deals – far more than originally expected – are subject to it. In this respect, it can be assumed that control procedures will increasingly both slow down and complicate transactions. Further regulatory influences can be observed in the due diligence process. Firstly, the transfer of personal data should be mentioned, which must always be examined sensitively. If AI is used as part of due diligence, both the obligations arising from the AI Regulation and AI compliance must be checked. Consequently, in the future, the positive knowledge of a company’s internal AI will have to be taken into account when attributing knowledge to sellers in the context of the SPA. Overall, the brief overview shows that transactions in 2025 and beyond will have to take much greater account of regulatory and compliance issues than has been the case to date.

On the other hand, the state itself intervened massively in national M&A activities. This is exemplified by the rescue takeover of the Meyer shipyard, which was certainly not “without alternative”, but was probably unavoidable in view of the associated jobs debate. The actions of the federal government in the sale of an initial block of Commerzbank shares and the resulting risk of a hostile takeover by UniCredit, which was more or less partly caused by this, are also unfortunate. As far as one thinks in European terms, this is not a disaster, but it does create some uncertainty for German SMEs.

For the reasons outlined above, 2024 has still been a difficult year for the German private equity market, particularly regarding deal financing and price expectations. High financing costs have put the traditional leveraged buyout (LBO) model under significant pressure, and at the same time many banks have been rather conservative in their valuation of potential targets and have shown a limited appetite to provide financing. Consequently, investors have been pushed to choose alternative financing models to make transactions possible after all, which has specifically led to an increase in hybrid and alternative financing structures to close funding gaps by using combinations of equity, debt and mezzanine capital more frequently. This has impressively shown that the private equity market is able to react with agility and flexibility to facilitate transactions even in challenging times. However, it should not be ignored that a considerable number of planned exits were deferred due to a lack of market appetite or differing price expectations, and it remains to be seen whether these exits can be made up for in 2025.

In parallel, high-growth industries such as technology, healthcare and life sciences, and renewables have continued to offer valuable opportunities and to remain attractive investment environments. Prominent examples from 2024 include CVC Capital Partners’ investment in CompuGroup Medical and the acquisition of Aareon by TPG and CDPQ, which each achieved purchase prices in the range of billions. This trend will likely continue in 2025, as the announced IPO of Stada by private equity investors Bain and Cinven already shows.

Irrespective of the current challenges, it should also not be underestimated that German Mittelstand companies (SMEs) are increasingly seeking succession solutions. Even though the Mittelstand has traditionally been a challenging environment for private equity investors, it is increasingly evident that SMEs are becoming more and more open to the private equity market, driven in part by rising retirement numbers within the so-called baby boomer generation. Without doubt, this will be a significant source of a variety of exciting and valuable transaction opportunities, and investors from abroad are increasingly focusing on and adapting to this evolving market already.

It is evident early in 2025 that the German private equity market is becoming more active, and it remains exciting to see which players will best adapt to the current market conditions.

Consequently, the decision-makers surveyed by the authors of the KPMG M&A Outlook assume that we will see many more deals in 2025, regardless of whether they are by strategic investors or financial investors. An increase of over 50% is considered realistic. The reason for this is likely to be that Germany in particular remains attractive for investment and that German companies still have an appetite for foreign investment, especially in the USA. This would also fit in with the M&A wave theory of the founding editor of the M&A Review, Professor Müller-Stewens. Every M&A wave needs a comprehensible driving force and the wave that is now starting could be driven by the megatrends of AI/technology and ecology as well as the energy and medtech/biotech sectors.