5 minute read 18 Dec 2019
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Reinvention imperative fuels M&A appetite in Germany

By

Constantin Gall

Managing Partner, Transaction Advisory Services, Ernst & Young GmbH

Over 13 years of experience in TAS. Trusted advisor. Transformation enthusiast. A passionate driver who likes traveling.

5 minute read 18 Dec 2019

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.

Macroeconomic environment

68%

of German executives see the global economy as improving.

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.

EY M&A survey Germany M&A expectations

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.

Digital strategy

41%

of German executives say their companies have digital capabilities infused throughout the business.

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.

In an age of innovation and technology, companies must take action and be open to entering into mergers or alliances with long-standing competitors. 

Many companies are forced to optimize their product portfolios and acquire new expertise and technologies. In many cases, takeovers or coopetition will be the fastest way to secure these changes, although the latter will be something German companies will have to manage culturally.

If German companies have plans to catch up, they will have to assign more of their total investment capital and increase the amount they focus on growth opportunities. Currently, 42% of German executives say they plan on devoting 25% to 49% of their investment capital on digital and technology versus 55% of global executives. Twenty-three percent say they will focus between 25% and 49% on new growth opportunities, versus 35% of global executives.

Despite reinvention, talent challenges remain

Even as German companies look ahead to reinvention, they face a number of challenges on the talent front, which could threaten to slow their progress. Almost three-quarters (72%) of German executives admit that their companies struggle to hire and retain staff — a much higher percentage than their global peers (61%). Of those, one-third say their biggest issue is finding and keeping talent with specific technical skills related to their core business. Interestingly, for 28%, the second-biggest talent gap is at the board and management level. Among global executives, only 15% cited this as a talent issue.

German companies are ready and capable of reinventing themselves for the future

Despite geopolitical and regulatory uncertainty, Brexit, trade and tariff issues, German companies are ready to reinvent themselves for the future.

To do so, digital investments need to be a more prominent feature of their transformation agenda. M&A, joint ventures and in-house corporate venture funds will be some of the options German executives will consider to accelerate growth and remain competitive in an increasingly fast-changing environment.

Summary

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, Transaction Advisory Services, Ernst & Young GmbH

Over 13 years of experience in TAS. Trusted advisor. Transformation enthusiast. A passionate driver who likes traveling.