Digitalization Mergers Boom Puts Investment Banks in Driving Seat

With automation increasingly a priority, many large firms are seeking to acquire expertise by buying technology firms. This is creating a mergers and acquisition bonanza for investment banks.
Samsung's $8 billion purchase of electronic systems provider Harman kicked off the digitalization boom.

The renowned futurologist Yuval Noah Harari once painted a dark vision of the digital revolution. "Most people will no longer be needed for the economy - they will be superfluous," he said.

Investment banks may not be the first affected group that springs to mind, but it seems that the world’s financiers are embracing those words. Experts in mergers and acquisitions, the premium class of investment banking, are now sensing opportunity, especially when it comes to deals involving automation.

Deutsche Bank, for example, is currently building a four-person Emerging Technologies Team in Munich and Berlin. "The convergence between technology companies and the traditional sectors will become more and more of a driver in the M&A business in the coming years," said Patrick Frowein, co-head of Corporate Finance at Deutsche Bank.

The classic M&A business is still dominant in investment banking today. This is where the experts known as rainmakers work on all kinds of takeover deals in various industries, deals worth billions. In the first quarter of 2017, the volume of mergers and acquisitions announced worldwide reached $684 billion (€635 billion), incorporating more than 8,600 transactions. Calculations show that U.S. investment banks Morgan Stanley, Goldman Sachs and Citi were most frequently involved.

Digital factories and digital administrations are changing the added value structures in all industries. Norbert Reis, Board member, HSBC Deutschland

Investment banking as a whole – which includes both M&A consulting and the issue of stocks, bonds and loans – is an important source of income for banks. Deutsche Bank dominates the market in Germany. It collected $76.1 million in fees in the first quarter. Bank of America Merrill Lynch and Rothschild follow close behind.

In the M&A business, investment bankers always make money when transactions are concluded. This is why the banks assisting with pharmaceutical giant Bayer’s acquisition of U.S. seed producer Monsanto will only cash in this fall, when the deal is concluded.

Investment bankers are convinced that the digitalization of industry and services will be the next gold mine. "Digitalization will drastically change M&A in the coming years. Acquisitions in a single industry will be pushed back in favor of cross-sector transactions. This applies to the telecommunications and automobile industry, for example, where digitalization is already changing sectors at a rapid pace," said Kai Tschöke, a manager at Rothschild.

Deals like the €15.3 billion purchase of technology company Mobileye, which specializes in accident prevention systems, by chipmaker Intel will become more common in the future. Intel is pursuing a simple goal with the purchase: to acquire the technology for self-driving cars.

The established German car industry also needs to beef up its capabilities with self-driving cars, multimedia networking and electric engines, said Mr. Tschöke, noting that German automakers have the capital and cash resources they need to move forward. Suppliers also need to be reorganized, he added. "One or more major deals involving cross-sector transactions this year, in which digitalization is the trigger, would not be surprising," the banker predicted.

Many investment bankers see Intel's acquisition of Mobileye as the starting gun for a new type of globalization. Prior to it, Samsung's purchase of electronic systems provider Harman for about $8 billion served as a wakeup call for experts.

"The auto industry, together with its suppliers, is a good example of the fundamental changes that digitalization of various sectors entails," said Armin von Falkenhayn, head of German operations for Bank of America Merrill Lynch, which places first in M&A volume in Germany, ahead of Deutsche Bank and Morgan Stanley.

Competitors took great interest in transactions such as Samsung/Harman and Intel/Mobileye, said Mr. Falkenhayn. "You certainly look into your own need for action, and some of the questions – partly because of the speed of the transformation – can only be answered with acquisitions or the sale of business units." Such dramatic changes are triggering a wave of purchases and sales of companies, he added.

"Digital factories and digital administrations are changing the added value structures in all industries. This doesn't just apply to the automobile sector," said Norbert Reis, a member of the board of HSBC Deutschland.

Transactions in the double-digit billions are not to be expected in the German market anytime soon. But in the coming years, many fast-growing startups will become attractive takeover targets.

For Thomas Schweppe, a managing director at Goldman Sachs, the digitalization of industry will trigger further transactions, often in the form of joint ventures or smaller acquisitions. He estimates that an acquisition like that of U.S. software maker Mentor Graphics by Siemens in 2016, for the equivalent of more than €4 billion, was one of the bigger transactions.

But the strong prospects for the future are not the only reason investment bankers are overflowing with optimism. "The year 2017 is going to be better than expected,” said Mr. Tschöke of Rothschild. “The drivers of deals are still in place: financing is cheap, the capital market is profitable, the economy is improving and the markets are optimistic. Bold investors have an opportunity to come out ahead through M&A."

Corporate spin-offs are also increasing. Retail group Metro, for example, plans to divide its business into a food business and a consumer electronics business (Ceconomy). Previous examples include utilities E.ON and RWE, which spun of their Uniper and Innogy business units last year.

"The number of spinoffs of business units has increased considerably. We assume that the trend will continue in 2017," said Jens Maurer, co-head of investment banking for Germany at Morgan Stanley.


Peter Köhler is a Handelsblatt editor in Frankfurt, reporting on banks, private equity firms, venture capital and corporate funding. Robert Landgraf is Handelsblatt's chief correspondent for the financial markets. To contact the authors: [email protected], [email protected]