International mergers and acquisitions had a poor start in 2016, with firms shunning deals because of turbulent stock markets and uncertain financing conditions. That meant the global volume of transactions slumped by approximately one third to $183.8 billion in January.
In Europe, the fall was even bigger, almost 56 percent to $24.4 billion. And in Germany, it fell by three quarters to just $2.3 billion.
Mark Shafir, global co-head of mergers and acquisitions at Citi, said it’s already clear that 2016 will fall short of the record volume of $5.05 trillion worth of deals reached in 2015. “If we land between $4 and $4.5 trillion that will still be a good result,” he said.
But it’s not all bad news. German companies remain top of the shopping list for investors from the Far East. The latest example: Two Chinese firms, Beijing Enterprise and China Tianying, are each bidding for German recycling company Energy from Waste (EEW), which has an estimated €1.8 billion purchase price.
In 2015, Chinese investors bought or purchased stakes in a total of 36 German firms. That put Germany just ahead of the United Kingdom, which caught up strongly last year with 34 transactions, according to a study by consultancy Ernst & Young (EY).
There isn't any reliable data for the volume of deals because in many cases the prices weren’t disclosed. Exceptions include Chem China’s purchase for €925 million, or $1.01 billion, of engineering group Krauss-Maffei, and the acquisition of private bank Hauck & Aufhäuser by the Fosun conglomerate for €190 million.
“Chinese firms have become an important group of buyers in the international transactions market — they’re increasingly involved in mega-deals and are paying billions for European companies,” said Yi Sun, a partner at EY Germany.
The trend is likely to continue in 2016. “The strong interest of Chinese buyers in German companies that offer access to markets and technology will continue to increase,” said Jens Maurer at Morgan Stanley, responsible for mergers and acquisitions in Germany and Austria.
In fact, China’s stock market slump has helped rather than hindered new deals. “It’s becoming increasingly clear right now that the Chinese economy must continue to be modernized,” said consultant Yi Sun. “So acquisitions of foreign companies are right at the top of the agenda.”
Chinese companies will likely play a stronger role in 2016 and beyond in the M&A market.
The pipeline for transactions in Germany is filling up. “Chinese companies will likely play a stronger role in 2016 and beyond in the M&A market,” said Carsten Laux, managing director for Deutsche Bank’s German M&A business. “The companies want to buy technology and are prepared to engage in major transactions."
The general outlook for dealmaking in 2016 remains difficult, though. Falling raw materials, especially the slump in the oil price, are weighing on sentiment, as is concern over slowing Chinese economic growth and over geopolitical risks such as the civil war in Syria.
2015 was the year of mega transactions. A total of 69 deals worth double-digit billion dollar sums each were announced, amounting to a total of $1.9 trillion. They included the takeover by Pfizer of Botox maker Allergan, creating the world’s biggest drugs group with annual sales of $63.5 billion and 110,000 employees. The transaction, worth $160 billion, was the second-biggest in history, exceeded only by the takeover in 2000 of German telecoms giant Mannesmann by Britain’s Vodafone for €180 billion.
“The market was really firing on all cylinders last year,” said Mr. Shafir of Citi, adding that it was driven by a surge in M&A activity in the United States. That’s because the sharp drop in oil prices enabled businesses from the United States to cut their costs. “Firms used their increased competitive strength to reinforce themselves with takeovers,” said Dirk Albersmeier, co-head of M&A at JP Morgan in Europe.
Financial investors, who in normal years account for a fifth of transactions, are having a tough time because their refinancing has become more expensive. Mr. Shafir said the the collapse of a debt mutual fund run by Third Avenue Management last year had triggered a sell-off in high yield bonds of the type that private equity portfolio companies use to refinance themselves.
But he added that some transactions arranged last year will be closed in the first half of 2016. “That could help brighten up sentiment.”
Investment bankers remain glass-half-full people despite the poor start to 2016. This year won’t break records, but the key driving forces behind mergers and acquisitions remain intact, they said.
“Companies have high cash holdings and financing costs for acquisitions remain favorable,” said Mr. Laux of Deutsche Bank.
Peter Köhler writes about banks, private equity, venture capital and corporate funding for Handelsblatt. Robert Landgraf is Handelsblatt's chief financial markets correspondent. To contact the authors: firstname.lastname@example.org, email@example.com