German M&A Trends in Industrial Manufacturing and Automotive

Automotive

In the first half of 2023, we saw a decline in the number of M&A deals in the German automotive sector of c. 30% compared to the same period last year, reflecting the overall more difficult market conditions facing the wider sector. However, one highlight that stood out so far this year was the highly anticipated IPO of Porsche, which showed that there is still investor appetite for the automotive sector, albeit for a more select set of assets.

Looking at German automotive targets, the acquisition of SAS Autosystemtechnik by Samvardhana Motherson, which was valued at €540m, was by far the largest transaction, showcasing the trend towards smaller deal sizes given the challenging financing conditions, which we also highlighted in our global report. Additionally, in the Parts and Components space, we saw the acquisition of Borgers and Prettl SWH, though both under difficult conditions as Borgers was in insolvency proceedings and Prettl SWH peer Leoni had to look for other solutions for their automotive cable division after their deal with STARK fell through. As mentioned in our global report, CASE (connected autonomous shared electric) assets are the focal point of the automotive industry. Particularly in the ‘shared’ sector, we saw several deals around subscription and leasing-based business models like Vive la Car, Cluno and Digital Mobility Leasing. Similarly, the ‘autonomous’ and ‘electric’ sectors continued to see strong deal activity, as seen by the acquisitions of Ibeo Automotive Systems and DeepDrive, as well as in the wider Mobility space like the acquisitions of Prophete, Dance GmbH or eROCKIT Systems.

Likewise, the German automotive buyers’ sphere strongly focused on CASE assets. We continue to see activity from German buyers in the ‘autonomous’ sector, exemplified by the investments of ZF in Oxa Autonomy, Continental in Kopernikus Automotive and Daimler Truck-backed Torc Robotic in Algolux. From the backdrop of the recent shortages of semiconductors, we see a continuous push to secure the supply thereof, either by outright buying assets in the space, e.g. Bosch acquiring parts of TSI Semiconductors, or through joint ventures, e.g. ZF and Wolfspeed. A continuous trend among OEMs remains securing the supply chain for EV batteries, which also extends to the critical raw materials, as seen by the rumoured partnership between Volkswagen and, among others, the Indonesian miner Vale.

We expect continuous strong deals activity around CASE assets as the industry’s transformation will further accelerate. At the same time, automotive companies are also likely to form joint ventures or other forms of cooperation to share development costs, e.g. the recent announcement of Nissan and Daimler Truck to form a joint venture by merging Hino Motors and Fuso, or look to sell assets now deemed non-core business. While ICE technology assets are mostly considered to belong to the latter part, some players might see them as parts of a larger roll-up and consolidation strategy.

Business Services

While the German business services sector stands out as the most active sector compared to the other IM&A sectors regarding deal count, the assets transacted are usually small. Also, we saw a slight decline in transaction count compared to the previous year of c. 5%. The main focus of investors so far were professional services firms and, more specifically, management and other (e.g. environmental, marketing, engineering) consulting and accounting firms. As we also pointed out in our global report, we expect these assets, including others like testing, inspection, certification and compliance firms, will continue attracting investor interest. This is mainly due to companies facing skilled labour shortages and using these firms to address them. Additionally, such assets have strong margins and low capex requirements, combined with an often fragmented landscape, making them attractive targets for PE investors looking at roll-up strategies.

Skilled labour shortages will also lead to employment agencies, e.g. HR and executive search services, being in higher demand and thus presenting attractive acquisition targets. We are already seeing a healthy amount of transactions in this space, and with the anticipated shortages becoming more prevalent, the space is poised to remain active in terms of deals.

Another focus area of investors is the education space. That includes professional training services for firms and consumer-oriented education offerings. Investors are betting on increasing disruption to the offline education space soon. Further, business models around the rental of equipment, electronics, and appliances saw some activity in the first half of this year. Investors might be betting on the “share economy” gaining momentum and trying to capitalise on this trend which could lead to further deals activity if this holds true.

Engineering and Construction

The German engineering and construction sector remained stable in the first half of 2023, with the same number of deals as in 2022. The sector continues to face uncertainty due to the economic conditions and worsening financing markets, contributing to increasing pressure on the already tight margins. The sector’s low margins don’t make it particularly attractive to PE buyers; nevertheless, we saw c. 57% increase in PE deals in the first half year of 2023 compared to 2022. In terms of buyer’s universe, the overall sector was dominated by buyers from the DACH region (c. 77%), of which c. 83% were from Germany.

The construction market saw the highest deal activity in the engineering and construction sector, followed closely by the civil engineering sector. The construction deals were dominated by plumbing, heating, and air-conditioning contractor acquisitions, followed by the water and sewer line construction sector. Meanwhile, the deal activity in the civil engineering sector was dominated by engineering services. The home building sector also saw one transaction by Strabag, which acquired the entire share capital of Adolf List Bauunternehmung, a housing constructor.

Companies in the construction market are using M&A to fill gaps in their portfolios, especially with smaller acquisitions in areas such as digitalisation, ESG, focusing on the Environmental element around sustainable construction materials. Additionally, companies are using M&A to address labour shortages. Deals driven by ESG include the recent acquisition of panel manufacturer Italpannelli Deutschland by ArcelorMittal’s Construction division, which will drive forward the production of CO2-reduced insulation products for the construction industry. ArcelorMittal, who recently became a member of the German Sustainable Building Council, is producing sustainable steel.

Currently, we are seeing more players in the market moving towards civil engineering as the demand for residential construction is slowing down. However, in the long run, public investments and infrastructure funding, such as Alliance for Affordable Housing, Digital Strategy 2025, and NextGenerationEU recovery plan, will bring additional funding for the sector. The German government is expected to invest €14.5bn in the construction of social housing by 2026. Moreover, the expansion of broadband with fibre optics is expected to provide a boost for the civil engineering sector. Although the funding will be spent over time, we expect this will nonetheless provide a boost to M&A activity in the long term.

Looking forward to the remainder of the year, we expect smaller strategic deals focused on technology, ESG, and technical capabilities to continue to be on the top agenda of engineering and construction companies.

Industrial Manufacturing

Deal activity in the German industrial manufacturing sector remained stable in the first half of 2023, with a slight decline of c. 4% in the number of deals compared to the first half of 2022. Corporates dominated the buyer’s universe (c. 56%), mainly from Germany (c. 61%). The majority of PE involvement (44% of the deals) came from German financial investors (c. 54%).

In the first half of 2023, we saw an increase in deal activity in the industrial hoses market, including the sale of Norres Baggerman from Triton to Nalka Invest, after low deal activity in this market the previous years due to the difficult business climate. We expect to see more M&A activity as the market is expected to grow with the forecasted growth in demand.

Another trend that we expect to continue into the second half of 2023 and 2024 is the deal activity in the heat pumps market, following the €12bn sale of Viessmann Climate Solutions, one of the largest players in the sector, to Carrier.

Deal activity will be driven by public investments, which are expected to bring additional funding for the refrigeration and heating equipment market. To achieve climate neutrality by 2045, the German government plans to install 500,000 new heat pumps per year from 2024 onwards. The previous year saw a record increase in the sales of heat pumps (53% increase in sales in 2022 compared to 2021). In addition, in the next few years, €13 - 14bn will be available for energy-efficient building renovation. Although the funding will be spent over time, we expect this will nonetheless provide a boost to M&A activity in the sector.

Asian and American suppliers, who have an advantage in the heat pump market, as they have been producing air conditioners on a massive scale for decades (which are similar in terms of heat pump technology) are a threat to European players. Thus, one could expect consolidation in the European market, which will drive the M&A activity.

We expect to see capabilities-led deals continue into the future as companies review their portfolios to improve performance and profitability. Cash from divesting non-core assets to focus on their core business, could be used to fill strategic gaps in technology and capabilities.

Innovative technologies and digital competencies were significant drivers behind the recent deals, such as Dürr’s acquisition of BBS Automation, which will support the strategic expansion of its automation business. While Giesecke+Devrient’s acquisition of MECOMO, a domestic telematics software developer, will enable it to become an IoT solution provider, offering its customers end-to-end services.

Siemens’s divestment program continues with the concept of portfolio companies, including the carveout of the large drives and motors business, Innomotics, which is expected to be completed in the second half of 2023, and the logistics business. Thyssenkrupp is also continuing its transformation program, with the IPO of the Thyssenkrupp Nucera and the planned spin-off of the steel division.