Deal activity in the German Industrial Manufacturing and Automotive (IM&A) sectors remained relatively stable in the first half of 2023 compared to the same period in 2022. The first half of 2023 saw continuous headwinds, which impacted M&A globally. Energy prices remained high and will continue to be a source of concern for the IM&A sector, especially for companies with energy-intensive operations. High inflation was an additional challenge as it led central banks to continue to hike interest rates in order to combat the soaring inflation. This resulted in significantly higher financing costs which weighed on PE-backed deals. The tightening monetary policy additionally impacted companies’ growth projections amidst uncertainty over the macroeconomic outlook and recession fears.
The economic uncertainty and the higher financing costs led financial investors to favour small- to mid-sized deals. Similarly, the challenging market conditions are driving corporates to strategically review their portfolios resulting from the ongoing transformation of the industry, key drivers being ESG and technology, such as automation and autonomous driving. Acquiring assets that are critical for that transformation is at the forefront of corporates’ M&A activity in order to bridge any technology or capability gaps they might have and cannot close with their current resources. At the same time, corporates are divesting non-core assets that don’t fit into their strategy, freeing up capital to be allocated elsewhere.
For the second half of 2023, we expect that the German M&A activity in the IM&A sector will remain at the current level. While we are seeing the first signs of inflation rates retreating and central banks easing on interest rate hikes, uncertainty, especially around energy prices, still remains. A sustainable recovery of M&A activity is dependent on the macroeconomic, financial and monetary environment, both globally and domestically, further improving. Most M&A activity will follow the outlined key industry trends as companies need to continue to close gaps in their technology and capabilities profile in order to successfully transform their businesses while divesting non-core assets to efficiently allocate their capital. We expect that small- and mid-sized deals will remain to be the majority as financing costs are likely to remain high. Companies with strong balance sheets can capitalise on these conditions by acquiring strategically important assets at lower valuations. Despite the large sums of dry powder, PE firms will continue to invest more selectively, both in terms of business models and size, until financing conditions improve.