It was going to be an early sign of spring for investment banking, which has been struggling of late.
Managers at Wall Street firms like Goldman Sachs, JP Morgan and Morgan Stanley were looking forward to juicy commissions on a mega pharma deal but Pfizer's takeover of Allergan fell through. It would have been worth $190 billion.
That wasn’t the only deal to fail. According to Thomson Reuters, takeovers worth $383 billion have been cancelled in the past 10 years.
It’s partly because of uncertainty about the global economy, the prospects of Brexit and the low price of oil.
The U.S. market won’t reach last year's level in 2016. Germany, on the other hand, ought to be significantly higher. Christian Kames, Citigroup
"The U.S. market won’t reach last year's level in 2016. Germany, on the other hand, ought to be significantly higher," said Christian Kames, head of investment banking for Citigroup in Germany.
So far this year, mergers and acquisitions worth $771 billion have taken place, down 25 percent on the same period last year.
But there’s light at the end of the tunnel, according to a study that examined the M&A plans of top executives worldwide and seen exclusively by Handelsblatt. According to the analysis, corporate leaders would like to start investing in companies again.
"Of the 700 executives polled for the study, 45 percent said they wanted to use their capital for acquisitions. In Germany, the share of executives wanting to make such purchases in the next three years is even higher, at 87 percent," said Ralf Thaeter, a partner at Herbert Smith Freehills in Germany, the law firm that conducted the study together with FT Remark.
One reason is a strategic shift among executives who are no longer just thinking about their shareholders but increasingly want to expand their companies. "Share buybacks and high dividend distributions will grow less important over the next 12 months," Mr. Thaeter said.
According to a study by Bain Consulting, a handful of companies in the United States recently spent up to 95 percent of their cash on share buybacks and dividends. Long-term analyses showed that in the medium term, buying back share certificates has little effect on the companies' yield on shares – the most important indicator of economic success from the standpoint of owners, according to Wilhelm Schmundt, a Bain partner.
For many companies, the wait-and-see is mainly due to high valuations. But that’s a mistake, say experts. "A few takeover candidates that are especially attractive from a strategic standpoint only come on the market in times of high valuations," Mr. Schmundt said. "Those who don’t act have to stand by and watch as the competition secures an advantage."
There’s also another factor, he noted: the higher "hurdle rates" of many companies that are sometimes 10 percent or more. Companies use these internal yield expectations as a threshold to help decide for or against an acquisition. If the threshold is set too high, the company may miss out.
A change of mind among executives could shake up the M&A market in the coming months. Mr. Thaeter, the merger expert, expects cross-border deals to grow, with corporations primarily seeking companies that operate in a relatively regional manner near their home markets – another finding from the study.
What appeals most to German managers are companies in Europe, which bring large transactions back into reach.
"We’ll likely see megadeals worth several billion euros again, Mr. Thaeter said. "But part of the growth we’re expecting in the next few months will come from many smaller transactions too, among mid-sized companies."
The German M&A market is likely to receive a boost from a separate business cycle that also boosted acquisitions last year following activity by Chinese investors. Several Chinese buyers were interested in EEW Energy from Waste and after a bitter contest, Beijing Enterprises eventually prevailed, buying the waste recycling company from financial investor EQT for €1.44 billion. It was the largest direct investment by a Chinese company in Germany to date.
Chemchina, a state-owned company, also went shopping in Germany, where it spent about €1 billion to acquire machine-builder Krauss-Maffei from Onex. And construction and service Bilfinger sold its water technology business to the Chinese company Chengdu Techcent Environment for €200 million.
"A few years ago, the Chinese were still focused on buying struggling car suppliers and companies in the solar sector," said Michael Ulmer, a partner with Allen & Overy. "Now their focus has widened and shifted, primarily in the direction of technology. Transaction volumes have also increased significantly."
Mr. Thaeter added: "Germany is still an interesting market in the global M&A business, mainly because of its attractive takeover targets, good infrastructure and trade agreements."
For the senior executives from around the world, the biggest obstacles to mergers and acquisitions in Germany were the country's strict antitrust laws and labor regulations. But that’s unlikely to deter any companies that discover a pearl.
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]and [email protected]