German M&A Trends in Industrials & Services

Automotive

The German Automotive sub-sector faced a difficult year. This was reflected in its M&A activity, with a further decline of 21% compared to 2023. Adoption of electric vehicles (EVs) has not met expectations, while Chinese OEMs are putting up increasingly stiff competition, especially in the Chinese market. Combined with a weaker economy and rising costs, many automotive companies were forced to enact restructuring measures or declare bankruptcy. Likewise, we observed that turnaround focused PE funds were active in the automotive space, such as AEQUITA acquiring Buderus Guss and Robert Bosch Lollar Guss, or Mutares acquiring Prinz Kinematics and Fischer Automotive Systems.

Other areas where we saw pockets of activity include customer-centric assets such as spare parts and accessories businesses (e.g. Apollo and others investing in AUTODOC) and car dealerships. The dealership space is currently very fragmented, combined with the ongoing rise of online retail, we expect to see further consolidation.

Another repercussion of the headwinds facing the German Automotive sub-sector is that companies are continuing to optimise their capital allocation by divesting any non-core assets while investing and expanding into areas necessary to strengthen their core business. Examples of this include the planned spin-off of Continental’s Automotive business and sale of parts of ContiTech, along with a potential IPO for some parts of Bosch.

While EV sales slowed during 2024, the transformation of the sector continues to be at the forefront of automotive executives’ minds. Connected, automated, shared and electric (CASE) assets and companies have drawn much interest, both as targets for acquisition or investment and as partners in joint ventures. Volkswagen and Rivian formed a joint venture to work on software and electronics architectures, just one of many recent examples of such collaborations. Other noteworthy deals in the space include Mercedes-Benz investing in Blaize and Porsche Automobil Holding investing in Celestial AI, while we also saw investments in FAAREN, FINN and Flex To Go, and the merger of TIER with Dott. Financial investors have also been showing an interest in this area, as highlighted by PIF’s investment in HOLON. We expect to see a steady deal flow for CASE assets for the foreseeable future.

Overall, the headwinds that have plagued the Automotive sub-sector in 2024 will continue to put pressure on companies during 2025. However, this will also create further opportunities for turnaround focused investors. The market conditions which automotive companies will need to navigate remain difficult, and this is likely to weigh heavily on deal activity.

Business Services

Overall market conditions also impacted the Business Services sub-sector, which saw 29% fewer deals than in 2023, although it remains very active compared to the other Industrials & Services sub-sectors. Investors favoured the sub-sector due to the less capital-intensive nature of its business models combined with a favourable outlook, as the services it provides are increasingly in demand.

The most active area in 2024 was the professional services space, which includes conventional management consulting and ESG consulting. Transformational changes such as AI and the increasing importance of ESG and ESG reporting are driving ever-higher demand for consulting services to navigate these challenges. This trend has attracted investors, and we expect a continued deal flow in the coming years.

Distribution and logistics consulting businesses were also involved in a significant number of deals. It appears that investors anticipate strong performance from these services, as geopolitical uncertainties are driving companies to reassess their production and supply chain footprints. There is potential for more of these deals in the future, although this will depend on developments in the realm of geopolitics.

In general, investors also showed interest in other businesses in the professional services space, such as accounting and auditing companies, test laboratories, and marketing services: an example of this can be seen in the $300m investment in DeepL by an investor group. Combined with a favourable outlook, the fragmented nature of the professional services space will continue to catalyse deals in 2025, for both corporate and financial investors.

Investors were also very active in the talent and employment space and in schooling and educational services. As companies continue to face shortages of both skilled and unskilled labour, services around recruitment and talent searching are becoming increasingly sought-after, especially for employees with unique or business-critical skillsets. As the transformation of many industries will also affect the labour force, companies are expected to use training and educational services to reskill or upskill their employees to retain them and meet changing demands. We therefore expect to continue to see more deals in these spaces while labour shortages persist.

Assets in the refuse, sanitary and sewerage systems continued to attract investor interest in 2024. As environmental concerns and measures continue to grow, companies operating in this space are expected to remain attractive targets for acquisition going forward. Likewise, waste and recycling management companies are likely to garner more interest as countries work towards implementing and expanding circular economy systems.

Finally, we saw a handful of deals relating to security systems services, as companies are increasingly focusing on both digital and physical security. Although pertaining to the product side, one large deal was made in this space: the sale of Bosch’s security and communications technology product business to Triton.

Engineering and Construction

The German Engineering & Construction (E&C) sub-sector saw a 26% decrease in deals compared to 2023, indicating ongoing challenges in the market. Corporates continue to dominate the ranks of buyers (56%), as the sub-sector’s low margins make it less appealing to PE investors. Investors in the sub-sector were mainly from the DACH region (65%), 75% of whom were from Germany.

High interest rates have been a major and persistent issue in recent years. This led to higher financing costs, which both affected the expected returns on new rental housing and posed financing problems for potential home builders. However, 2024 saw the European Central Bank lower its key interest rates a total of four times, while building material prices stabilised and the German Growth Opportunities Act introduced accelerated depreciation for newly constructed residential buildings. As a result, we believe that investment may rebound in 2025 – particularly in the residential construction space, as demand for housing remains high.

The commercial construction space presents a mixed picture: while commercial building construction is currently suffering from weak demand, civil engineering is proving much more robust. Investment in infrastructure projects – from rail upgrades and power lines to broadband expansion – is providing a sustained boost to demand. For example, Deutsche Bahn invested almost €17bn for work on track, stations and other parts of Germany’s rail infrastructure in 2024.

The engineering services space was a bright spot for M&A activity in 2024, as its business models are less capital-intensive than in many other areas. The large number of deals also underlines the desire of companies to acquire skilled workforces and capabilities for digital transformation and automation. An example of this was SPIE’s acquisition of an 87% stake in Otto Life Science Engineering, a provider of engineering, procurement and construction (EPC) services for pharmaceutical and biotech production facilities and laboratories. With recurring cash flows and good opportunities to implement roll-up strategies, we anticipate that these service companies will keep attracting investments from both corporate investors and from private equity.

The plumbing and heating market also continues to see a steady deal flow, with the second-highest number of transactions in the sub-sector after the engineering services market. This trend is being driven by the transformation of energy and heating systems for buildings. An example of this is Babcock Wanson Group’s acquisition of the VKK Group, a player in the German industrial boiler market.

E&C companies are adopting AI and other digital tech to enhance productivity, improve the customer experience and streamline operations. Companies leveraging these technologies are expected to become industry leaders, so many are looking to obtain digital skills through acquisitions, as seen in ZETA’s acquisition of SIGMA Process & Automation.

Looking ahead, dealmakers need to stay agile and strategically focused to seize emerging opportunities and tackle upcoming challenges. E&C companies continue to innovate, especially with early AI adoption for design automation and product development. Companies with significant infrastructure exposure, including engineering services, and power and telecommunications, continue to be attractive assets in this environment. Declining interest rates should buoy up the sub-sector as a whole and boost M&A activity.

Industrial Manufacturing

Although the German Industrial Manufacturing sub-sector experienced a 29% decline in the number of deals compared to 2023, it remains the most active sub-sector. Most of these deals involved small to medium-sized assets, with financial investors, primarily from Germany, making up 51% of the buyers.

In our 2024 mid-year update, we noted that storage batteries were driving significant deals. This trend persisted in the second half of the year, exemplified by Dutch investor Return’s investment in J&P Batterie Projekte. Overall, there is great and growing interest in manufacturing companies that have a focus on more sustainability and higher energy efficiency, as demonstrated by a €215m investment by an investor group in Sunfire, a company that manufactures electrolysers to decarbonise industrial sectors still reliant on fossil fuels. In general, we expect sustainability to become even more important for Industrial Manufacturing, both as a value lever in daily operations and as a criterion during acquisitions.

Ongoing technological innovation in manufacturing processes also remains a key driver of M&A activity. Manufacturers are increasingly investing in modernisation of both their product ranges and their internal operations. Technological advancements, especially in areas such as AI, machine learning, predictive robotics and intelligent factories, are consistently enhancing operational efficiency in Industrial Manufacturing, and will spur M&A activity as companies look to acquire these capabilities. This is exemplified by Siemens’ proposed acquisition of Altair Engineering, a provider of software in the industrial simulation and analysis market, for approximately €10bn. Similarly, GEA’s acquisition of CattleEye and its AI solution for detecting and treating lame dairy cattle adds to GEA’s existing portfolio of solutions for dairy farms and underscores the growing interest in AI-powered solutions.

Bosch’s announcement of its plan to acquire the Johnson Controls-Hitachi Air Conditioning joint venture for €7.3bn demonstrates how companies are strategically enhancing their product portfolios to strengthen their market position. Conversely, Siemens’ €3.5bn sale of its electric motor and drive system business, Innomotics, to KPS Capital Partners illustrates how companies are likely to continue divesting non-core assets to optimise their portfolios. Deciding where to allocate capital will be an important discussion point for industrial manufacturing companies, even in the context of falling interest rates. Consequently, we expect to see further carve-outs in the short and medium term, leading to more robust M&A activity.

Overall, Industrial Manufacturing assets should continue to attract investors and we anticipate that deals will increase. However, a recovery to levels typical of recent years will be dependent on broader economic and political factors in Germany and abroad.