German dealmaking at record pace despite warning signs in the distance

Enough for a downpayment. Source: DPA

Europe’s biggest economy continues to benefit from a global boom in mergers and acquisitions as companies look to expand their footprints, and flush financial investors continue to suffer from a dearth of investment ideas. In the first nine months of 2018, German companies announced deals worth a total $216.9 billion (€184.7 billion), a 137 percent increase over the same period last year, according to figures from Thomson Reuters.

The numbers are propped up by Deutsche Telekom’s T-Mobile US unit’s near-$59 billion agreement for rival Sprint as well as utility E.ON’s $39 billion purchase of RWE subsidiary Innogy – the two largest German-related deals this year. The purchases have created a boon for investment banks, who pocketed $2.1 billion in Germany in the first three quarters of the year, though they also bring in income from IPOs and bond issues.

“The most important drivers for M&A are currently gaining more market share and purchasing new technologies,” says Patrick Frowein, Co-Head of Corporate Finance in German-speaking regions for Deutsche Bank.

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The boom in Germany is just a mirror of dealmaking around the globe, which may yet surpass the $3.78 trillion record set in 2007. Although the first nine months of 2007 brought $25 billion more in deals than the same period in 2018, experts say this year could still see a mind-blowing $5 trillion in deals after half that was achieved in the first half.

“Many companies have high liquidity reserves and can benefit from low interest rates in the event of takeovers,” says Volker Brühl, head of the Center for Financial Studies at Frankfurt’s Goethe University. The pharmaceutical, chemical and retail sectors are particularly ripe for more deals to take out ailing rivals or expand market share, he says.

However, there are signs that the market may be weakening. Deals are now taking longer to close, warns Holger Knittel, head of German-speaking M&A for Citibank, and there are fewer acquisitions in mid-sized companies says Leon Saunders Calvert, Global Head of M&A at Thomson Reuters. And Ebitda multiples – operating profit versus purchase price – last year reached an average 14.2, which exceeds the comparable figure during the dotcom bubble.

“There is speculation in the market that the US will slide into recession next year or 2020,” says Tan Chong Lee, European head of Singapore’s Temasek sovereign wealth fund, which manages assets of almost €200 billion. Mr. Tan has become more cautious in his investment policy, and others may take heed.

Andrew Bulkeley is an editor in Berlin for Handelsblatt Global. Handelsblatt reporters Peter Köhler and Robert Landgraf contributed to this report. To contact the author: a.bulkeley@handelsblattgroup.com

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