5 minute read 21 May 2020
An investor reacts as he monitors the share index in a stock market gallery

Why German companies see opportunities for M&A in an uncertain future

By Constantin Gall

Managing Partner, Strategy and Transactions, Ernst & Young GmbH

Decades of experience in transactions, corporate finance, strategy and international management. Trusted advisor. Transformation enthusiast. Passionate driver who likes traveling.

5 minute read 21 May 2020

Tight liquidity and declining margins create risks for some German companies and M&A opportunities for others.

The global economy is in crisis as the consequences of the COVID-19 pandemic become more widely known — both in terms of the impact on human health and the economic fallout. Germany is no exception, as the results of the latest EY Global Capital Confidence Barometer (pdf) indicate.

Of the 145 German companies surveyed (of 2,900 senior executives worldwide), 59% said they anticipate minor consequences for Germany. However, at the time of the survey, which ran between 5 February and 26 March 2020, as levels of uncertainty were changing by the day, 40% of German respondents expected the pandemic to have a severe impact.

COVID-19’s impact on profitability


of German companies expect their margins and profitability to be strongly impacted.

Further, 38% of German respondents said they wanted to make changes to their workforce, while 31% were re-evaluating the situation. Many German companies are not ruling out the option of hiring freezes or crisis-related layoffs. Within days of the German government introducing the Kreditanstalt für Wiederaufbau (KfW; Credit Institute for Reconstruction) special loan program, banks received thousands of applications, as German companies contended with sinking sales and revenues.

Liquidity remains top-of-mind

The top priority for most German companies is securing liquidity. This is particularly so for the sectors most impacted by the pandemic crisis, of which, 28% of German respondents said advanced manufacturing was the hardest hit, followed by automotive (27%). Production in both of these sectors has come to a virtual standstill as global supply chains falter and the availability of key parts is disrupted. In response, 36% of German respondents surveyed (versus 52% of global respondents) say they will be making changes to their global supply chains, with 58% saying they will need to re-evaluate (versus 40% of global respondents). If there is one painful lesson to be drawn from the pandemic, it is that just-in-time production and tight global interconnections are vulnerable in times of crisis.

Next, companies looking to seize opportunities will fast-track their digital transformation agenda

German companies face substantial uncertainty and challenges ahead, but they also recognize that the pandemic crisis may open up opportunities, small and large. Companies are embracing an environment that is driving innovation, creativity and faster change to processes. Companies that can, have shifted to remote work models, which is accelerating advances in digital transformation, such as video conferencing tools or digital workspaces. As a result of this crisis, 34% of German companies said they were taking steps to change their digital transformation efforts, while 60% were re-evaluating their digital transformation agenda.

Digital transformation


of German companies are taking steps to accelerate automation in their operations.

The current crisis has shown that companies must accelerate their digital transformation agenda. In the future, not having a functioning digital business model will not pass muster.

Looking beyond, M&A transaction appetite will grow

Even though there is a risk to profitability, German respondents recognize opportunities for favorable acquisitions. More than one-quarter (26%) said they have plans to expand their market share through M&A, while four in 10 (40%) are expecting that shrinking valuations will make potential acquisition targets more attractive. Further, 76% say they expect an increase in cross-border dealmaking in the next 12 months.

Around the world, companies are keeping a particularly watchful eye on the M&A market. In the acute phase of the COVID-19 crisis, interested buyers may hold back initially. However, declining valuations will likely lead to a significant increase in M&A activities. Post-financial crisis, many companies were risk averse and chose not to pursue M&A. They have learned a valuable lesson from that experience. In particular, we expect portfolio companies will weather the crisis better. Compared to closely interconnected competitors, portfolio companies are more open to alliances and joint ventures, and can be more willing to divest of assets or spin off business divisions. In fact, 88% of German companies are finding more opportunities for divestitures as part of their strategic review processes than they did three years ago.

Executives will have to adjust to a different business environment

Amid an ongoing sea of uncertainty and with customers shifting their behaviors, likely forever, German companies will have to adjust to a “new normal.” They will have to rethink their supply chains, either by moving from global to local, or by evolving from a linear to data-driven, cloud-supported networked supply chain. Some companies with higher debt levels may also consider divesting assets. A look back at the 2009 financial crisis provides a roadmap for German companies to follow in the future: companies that react in a planned, considered and bold manner now, will have the resilience to emerge stronger as economies locally and globally recover.

Five critical questions German companies should ask to build business resilience and develop a recovery roadmap

  1. How can you operate in a business-as-unusual environment? German companies need to expect future crises and plan accordingly. Scenario-planning incorporating lessons learned from COVID-19 will help German companies build their resilience.
  2. Do you know your portfolio’s weakest link? For some German companies, profit margins and revenue generating capabilities were stressed before the pandemic crisis. To withstand shocks and create optionality, German executives need to examine their portfolios for liquidity vulnerabilities.
  3. Can you look beyond the immediate crisis to see the next steps? More frequent strategy and portfolio reviews are a mindset as much as an event. German executives need to develop systems that can pivot quickly as circumstances change.
  4. Are you prepared for a new environment? The post-crisis environment may be very different from what happened before. German executives need to be bold in their strategic decision-making to take advantage of new market dynamics.
  5. How can you learn from the past to be bolder in the future? Companies that made bold acquisitions in the immediate post-global financial crisis period outperformed peers over the next decade. German executives need to be ready and able to make the deals that will supercharge growth.


The EY Global Capital Confidence Barometer (pdf) gauges corporate confidence in the economic outlook and identifies boardroom trends and practices in the way companies manage their Capital Agendas.

About this article

By Constantin Gall

Managing Partner, Strategy and Transactions, Ernst & Young GmbH

Decades of experience in transactions, corporate finance, strategy and international management. Trusted advisor. Transformation enthusiast. Passionate driver who likes traveling.