Reinvention imperative fuels M&A appetite in Germany

Despite an economic slowdown, German executives actively pursue M&A to future-proof their businesses.

As Germany’s economy slows down faster than other European countries, German executives are feeling less optimistic about the economic outlook, both globally and locally, than a year ago. However, slowing economic growth, trade and tariff issues, and regulatory or geopolitical uncertainty are not softening German executives’ appetite for M&A, according to the latest edition of the EY Global Capital Confidence Barometer. They recognize that now more than ever, they need to reinvent themselves for the future.

Slowing economic growth tempers optimism among global executives

In the latest EY M&A survey, 68% of German respondents perceive the global economy to be growing, down 20 percentage points from 12 months ago. At the same time, 17% now believe the global economy is in decline. A year ago, not a single respondent saw the global economy on the edge of a downturn.

The slowing economy in Germany has hit several sectors hard, with the automotive industry feeling the impact most deeply. The accelerated need to move toward electric and autonomous vehicles is challenging German automotive companies to reinvent themselves, even as they fend off intensifying competition. Meanwhile, financial services organizations face mounting pressure from consumers for a broader range of digital banking services. Similarly, as climate change becomes an increasingly important consideration for consumers, power and utilities companies are having to look beyond wind to other sources of renewable energy.

Despite the current confidence that the global economy is growing, pessimism prevails as German companies consider the medium- to long-term outlook: 80% expect the global economic situation to deteriorate by 2022 at the latest.

Locally, German respondents are feeling more positive than current trends otherwise suggest.

As the pressure to reinvent mounts, German companies look to M&A to fast-track their transformation journey

As the imperative for reinvention escalates, German executives continue to look to dealmaking to help them fast-track their transformation journey, with two-thirds (65%) indicating that they are actively pursuing M&A in the next 12 months. Although this is down seven percentage points from six months ago, it remains well above the historical average.

Further, nearly half (48%) of German executives continue to see the M&A market improving over the next 12 months, while 42% see the M&A market stabilizing.

Of those who are buying, half are looking to acquire transitional capabilities, such as digital assets and companies that offer new routes to customers — assets that ultimately will change how their company operates. German executives also cite sector convergence and growth into an adjacent business activity as a primary driver. Historically, the European Commission (EC) has limited convergence efforts across the European Union (EU) to preserve competition. Earlier this year, M&A deal rejections and amendments by the EC reached new highs. However, as competition from companies outside the EU, where consolidation of big players is more accepted, threatens the success of European companies on the global stage, German companies would benefit if the new EC looks more favorably upon convergence as a means of building pan-European champions — an opportunity that could give German companies a clear advantage.

German companies are not on par with the overall digital innovation curve

Yet to seize such an advantage, German companies may have to do more to advance their digital transformation efforts. Although technology should serve as the underpinning enabler of any transformation strategy, German companies appear to be behind the curve when it comes to digital innovation. According to EY M&A survey results, 41% of German companies have digital capabilities infused throughout their business, versus 49% of global companies. At the same time, 55% of German executives cite increased competitive pressures and increased barriers to entry as the biggest impacts digital transformation have had on their company.

Although the overall numbers suggest Germans are not on par with the overall digital innovation curve, some German companies have been successful in areas of the new industrial revolution, including the Internet of Things (IoT) and edge computing, artificial intelligence (AI) and machine learning, as well as automation and robotics, for example, in the automotive industry.