German M&A Trends in Industrial Manufacturing and Automotive

Automotive

2023 was a difficult year for M&A activity in the German automotive sector, where we saw a further decline of 7% compared to 2022. Nonetheless, we saw a stronger second half of 2023 when compared with the first, potentially signalling a positive note for deal volume in 2024.

As outlined above, the industry faced numerous headwinds, paired with its continued transformation. European automakers are increasingly facing competition from Chinese EV companies, exemplified by BYD overtaking Tesla in delivered vehicles in Q4. As in the past, most buyers of German automotive assets were strategic investors (65%), further highlighting the decision among PE to be more selective when investing in the automotive space.

Still, there were some notable deals this year, e.g. the acquisition of SAS Autosystemtechnik by Samvardhana Motherson, which also bought Dr. Schneider Holding out of bankruptcy, the sale of Behr-Hella Thermocontrol (BHTC) by Mahle and Hella, Hon Hai acquiring 50% of ZF’s axle assembly business and the public takeover offer for Vitesco by Schaeffler.

CASE assets will remain at the forefront of German automotive companies’ strategic priorities. To gain access to these assets, they will continue to form alliances or JVs with CASE companies and acquire or take stakes in those companies. Examples of these deals in 2023 were, e.g. Bosch acquiring parts of TSI Semiconductors, ZF forming a JV with Wolfspeed as well as investing in Oxa Autonomy, Porsche acquiring a minority stake in Mobileye Technologies as well as VW collaborating and investing in XPeng while also forming a partnership with Indonesian miner Vale.

Another key area of focus in the high-interest rate environment will be financing costs and cost of capital, with liquidity concerns surrounding some suppliers. We have already seen partial signs of weakness, which could be further exacerbated if interest rates remain at current levels longer than anticipated. However, these conditions may also lead to M&A opportunities with companies attracting investors in search of capital or by continuing to review their portfolios and selling non-core businesses to optimise capital allocation (e.g. Mahle and Hella selling their JV BHTC or Continental looking at options for their Automotive division and ContiTech).

Business Services

The German business services sector experienced a strong year with an increase of 16% in deal volume compared to 2022, with the buyer’s universe mostly consisting of financial investors (57%). In a high-interest rate environment, the less capital-intensive business model made business services companies an attractive target for M&A activity, and we expect this to continue in 2024. While most deals in this sector are relatively small, the most prominent deals in 2023 were the merger between Apleona and Gegenbauer and the sale of GfK’s consumer panel business to YouGov.

The most M&A activity could be seen with professional services companies, especially management and other (e.g. ESG, IT, marketing) consulting firms. Due to the fragmented landscape, we expect this sub-sector to continue to see high M&A activity in 2024, as they are also operating in a favourable environment. Digital and AI capabilities will transform the business models of professional services companies and their clients, leading to increased demand for these services. Additionally, as ESG criteria and reporting requirements evolve, companies will increasingly rely on outside advisors to help navigate them.

Another focus area for investors was workforce-related sub-sectors such as HR and talent search services. Additionally, educational services, both professional training services and consumer-oriented education, also drove M&A activity in 2023. Skilled labour shortages will continue to increase the demand for HR search services in 2024. At the same time, companies will look to provide their employees with upskilling possibilities to enhance retention or equip employees with the necessary skills in a shifting work environment.

Engineering and Construction

Despite the challenging economic conditions, the German engineering and construction sector remained stable in 2023 due to strong deal activity in Q2 2023. Regarding the buyer’s universe, the overall sector was dominated by corporate buyers (61%), mainly from Germany (58%). Most PE involvement also came from German financial investors (64%).

The M&A deal activity in 2023 was dominated by companies acquiring workforce and capabilities in digitalisation and automation. An example is BayWa Haustechnik’s acquisition of Urlbauer Haustechnik, a plumbing, heating and air conditioning contractor. BayWa Haustechnik made this acquisition to address labour shortages and expand its workforce by 115 employees. Additionally, to enhance its product portfolio, BayWa Haustechnik acquired Emmeringer Heizbau, which specialises in installing heat pumps in conjunction with photovoltaic systems, battery storage, and wall boxes. Generally, the plumbing and heating market continues to attract steady deal flow, with the second-highest number of transactions after the engineering services market, where most deals were also driven by workforce acquisition. For example, the APEX Group acquisition of Plant Engineering will give it access to a team of 16 engineers.

The construction industry in Germany continues to be dominated by family-owned businesses, which maintain close control over their working capital to avoid financial problems. However, the impact of the lingering economic uncertainty and economic headwinds from interest rates could have a delayed impact on the sector, especially the looming potential of defaults in the residential real estate market. Thus, investing in technologies to improve operations and efficiencies will remain a driving factor for M&A in the sector to mitigate these risks. Engineering and construction companies will target technological capabilities such as 3D modelling, robots on worksites, and AI to automate initial design to mitigate labour shortages. Another driving force in the sector is sustainability, which will continue to drive M&A as players focus on recycling and lean construction. Investors will favour targets that focus on decarbonisation.

Industrial Manufacturing

The M&A activity in the German industrial manufacturing sector picked up in the last two quarters of 2023 (Q3 2023 was up by 63% vs 2022, while Q4 2023 was up by 42% vs 2022). This made the total number of deals in 2023 35% higher than in 2022. Corporates dominate the buyer’s universe (57%), where over half of the corporate buyers came from Germany. Similarly, PE deals (43%) were also dominated by German investors (51%).

Industrial manufacturing companies continued to review their portfolios to divest non-core assets to focus on strategic growth areas. The largest deal in the sector in 2023 was Carrier’s step towards its portfolio transformation, where they acquired Viessmann Climate Solutions for €12bn. Following this, Epta, the refrigeration machinery producer, and Viessmann Refrigeration Solutions agreed to create a joint venture in the commercial refrigeration sector, with a combined turnover of €400m. A few other smaller deals also followed in the heating and refrigeration sector during the year.

2023 continued to see fewer large deals than usual for the sector, where some of the bigger deals in the sector include the Fortive Corporation €1.4bn acquisition of EA Elektro Automatik, the supplier of high-power electronic test solutions and Ara Partners acquisition of Vacuumschmelze, the producer of advanced magnetic materials. Most deals were small- to mid-size due to the sellers’ and buyers’ valuation gap and high financing costs. We need to see a fall in interest rates before the return of large deals.

Strategic deals focused on technical capabilities were on the top agenda of industrial manufacturing companies who continue to invest in capabilities in robotics, predictive maintenance, 3D printing and machine learning, such as Dürr’s acquisition of BBS Automation. We expect this trend to continue into 2024.

The biggest challenge industrial manufacturing companies will continue to face in 2024 will be the rising cost of labour, driven by skilled labour shortages. While the initial shock of the energy crisis, interest rates, raw materials cost, and supply chain issues will stabilise in 2024. This will leave M&A activity broadly stable in the first half of 2024, followed by a gradual increase in activity in the second half of the year. However, improved macroeconomic conditions and stable financing markets are required for a strong rebound in M&A activity.