The German Industrials and Services sector saw a bumpy start to the year, with a decline in transaction volume of approximately 35% when compared to the same period last year. Persistent headwinds like the economic slowdown, high inflation, and interest rates as well as global political uncertainties weighed on deal activity. Buyers have become more selective in choosing where to invest, and apparent valuation gaps between sellers and buyers have caused many deals to be stalled or postponed.
Due to the high interest rate environment, we saw deals with Private Equity buyers decline by approx. 25% as the higher financing costs hampered financial investors, though available dry powder remains at high levels. However, corporate buyers retreated at an even larger pace with a decline of approx. 45%. Faced with simultaneous adversities, companies are required to set priorities on how to effectively deploy their capital.
Strategic Portfolio Shifts: Sustainability and Digital Transformation Lead the Way
As we highlighted at the beginning of the year, we continue to see companies actively reviewing their portfolios to identify gaps in relevant technologies or capabilities needed for the transformation of their business models, with environmental and sustainability considerations as well as digital transformation being key drivers. As a result, corporate buyers are searching for and acquiring assets that fit these gaps. On the other hand, assets which are deemed non-core are being divested to optimise capital allocation, although some sellers are gaging the best time to initiate a sale process in anticipation of better market conditions.
“We expect deal activity to rebound in the short- to mid-term if the current challenges weighing on the Industrials & Services sector subside. The accelerating technological transformation the sector is undergoing, will lead companies to continue to search for tech-enabled assets, as the transformation will drive them to rethink and reinvent their business models to stay competitive.”
Subsector trends
Aerospace and Defence
The German aerospace and defence (A&D) industry saw a decline in the first half of 2024, with approx. 55% fewer deals compared to the same period in 2023. This is mainly due to the lack of deals in the aerospace industry which dominated the first half of 2023. Ongoing supply chain and economic challenges, high interest rates and competition for talent continue to plague the industry and slowed M&A activity. Additionally, the introduction of a 19% increase in German aviation taxes poses further headwinds for the commercial aerospace industry.
To counter these challenges, we expect companies to act by making investments through smaller acquisitions and strategically reviewing their portfolios. Additionally, we expect that buyers will continue to look for opportunities in the aerospace area, for example in the maintenance & repair space as aircraft fleets get older and are being steadily expanded as can be seen by the robust order backlogs of aircraft manufacturers.
On the other hand, we saw the defence space being the main driver of deal activity in the A&D industry in the first half of 2024. Ongoing geopolitical tensions, from Ukraine to the Levant, have prompted many governments to enhance the strategic independence of their defence systems as well as replenish dwindling stockpiles. The latest SIPRI yearbook underlines this, as it notes that defence spending accumulated to €2.3tn in 2023, the highest amount recorded so far.
The increase in government spending is attracting more financial investors to the defence space, despite the regulatory challenges they often encounter. Corporate buyers are also seeking assets to fill strategic gaps or gain access to new technologies. For example, Rheinmetall has invested in Lake Fusion Technologies, a LiDAR tech company, as well as Iceye, a satellite tech company. Overall, space assets are continuing to attract interest from buyers, such as an investor group acquiring a minority stake in ATMOS Space Cargo.
In general, the A&D industry should benefit from increased government spending stemming from heightened geopolitical tensions, which will drive M&A activity. The M&A activity in the second half of 2024 will likely be focused on small to medium sized acquisitions, compared to larger deals as companies look to address strategic and labour talent gaps, as well as secure supply chains and production capacity through vertical integration.
Automotive
As we anticipated in our outlook, the German automotive industry faced difficult market conditions in 2024. The high interest rate environment paired with economic and political uncertainties, weighed on vehicle sales, both internal combustion engines (ICE) and electric vehicles (EV), putting pressure on OEMs and suppliers alike, some forced to enact restructuring measures or falling into administration. Likewise, in the first half of 2024 we saw a decline in the number of M&A deals in the German automotive industry of approx. 25%, when compared to the same period last year. The buyer universe was mostly comprised of strategic buyers, as PEs for the most part avoid the wider space, except for funds specialised on turnaround situations, e. g. AEQUITA acquiring Buderus Guss and Robert Bosch Lollar Guss, or Mutares acquiring Prinz Kinematics and Fischer Automotive Systems.
In the current macro-economic and interest rate environment, automotive companies will continue to need to decide where to allocate their capital effectively, both in terms of products and geography. This means optimising their portfolio by either disposing non-core assets or acquiring assets that fit their long-term core strategy. The takeover of Vitesco by Schaeffler, which was one of the largest deals so far this year, the plans by VW to reduce its stake in Traton or by Bosch to potentially IPO parts of its business are examples of this strategy being put into place.
Although the short-term outlook of EV sale volumes is less optimistic compared to a few years ago, we see continuous interest in the space (e. g. Poclain Hydraulics investing in MOTEG). In general, assets contributing to CASE (connected, automated, shared, electric) strategies remain a focus point for M&A activity for buyers, strategic and financial alike. The “shared” space in particular saw a flurry of deals, with investments in FAAREN, finn and Flex To Go as well as the merger of TIER with Dott. German buyers also continued to invest in the AI/automated space, e. g. Mercedes-Benz investing in Blaize and Porsche Automobil Holding investing in Celestial AI.
For the second half of the year, we expect the automotive industry to continue to face headwinds which will also be reflected in its M&A activity. This will hold especially true for assets with no or limited application in the electrified environment. Nonetheless, ICE related technology will still hold value in regions where EVs are expected to be adopted at a later stage, hence a geographical shift, potentially also via M&A, is expected to take place in the coming years. We might see a pick-up in deals activity if the uncertainties weighing on the sector subside, but companies may opt to postpone any larger deals until then. Investments in relevant assets needed for the transformation of the industry will continue to garner high amounts of interest from buyers.
Business Services
The first half of 2024 was difficult terrain for deals activity in the German business services industry, with a decline in deal volume of approx. 40% when compared to 2023 as the problems the wider sector faced also affected business services. However, it is still a very active industry in terms of M&A, due to their capital light business models making them attractive targets in a high interest rate environment.
As we predicted at the beginning of the year, assets in the management consulting space saw the greatest amount of M&A activity. This also includes ESG consulting as well as accounting and auditing firms. The space remains fragmented, making it attractive to both strategic and financial buyers looking to create a platform through a roll-up strategy. Furthermore, these firms operate in a favourable environment as the need for their services continues to increase, e. g. due to an increase in and emphasis of reporting and regulatory requirements. Also, the digital transformation requires many companies to lean on the services of external consultants to help them navigate the ongoing disruption. On the other hand, AI and other digital tools are also having a profound impact on the business model of professional services firms themselves, which could be an ongoing driver of M&A in the coming years.
Another area that is garnering further interest from buyers is talent and employment agencies. With workforce shortages already prevalent and likely to be only exacerbated with an aging population, companies will turn to outside parties to help search for talent or help retain it. This will also need to entail upskilling current employees, which should make professional educational service providers an attractive target for buyers.
While we saw a slow start to the deals activity in the business services industry for the first half of 2024, we expect that it will continue to be an attractive industry for buyers and see an increase in activity again going forward. Favourable conditions within the industry, such as the possibility for platform and roll-up strategies or overall macro-trends, will provide opportunities for strategic and financial buyers alike.
Engineering and Construction
The German engineering and construction (E&C) industry saw an approx. 40% decrease in deal count compared to the same period last year, reflecting the overall more difficult market conditions the industry is facing. Corporates dominated the buyer’s universe (approx. 53%), mainly from Germany (approx. 41%). Most of the Private Equity involvement (approx. 47%) came from German financial investors (approx. 53%).
During the first half of 2024 businesses were hesitant to deploy capital given the macroeconomic and geopolitical environment. Despite the high demand for housing, high interest rates and construction costs have proven to be strong headwinds for the industry. Particularly the residential construction space is experiencing a lack of orders as well as the cancellations of many projects. Further, the shortage of skilled workers is exacerbating the housing construction gap.
A bright spot of M&A deal activity so far has been the engineering services space due to their less capital-intensive business models and underlining companies desire to acquire workforce as well as capabilities such as digitalisation and automation. Examples of this are Apleona’s acquisition of Air for All, a provider of installation and maintenance services around ventilation and air-conditioning technology, and the acquired majority stake in Erge Deutsche Brandschutz, a specialised provider of installation and maintenance services for fire protection systems. Generally, the plumbing and heating market continues to attract steady deal flow, with the second-highest number of transactions after the engineering services market, driven by the transformation of building energy and heating methods, e.g. the shift towards heat pumps.
Looking ahead, M&A activity in E&C will highly depend on further inflation rate changes which, in turn, will dictate interest rate policy as well as the development of construction costs. As demand is still high, an easing of these pressures will result in a rebound in business and deal activity. Nonetheless, we currently still see an opportunity in selective areas for players in the E&C industry to capitalize on lower valuations and create value through acquisitions.
Industrial Manufacturing
While the German industrial manufacturing industry saw a decline in deal count of approx. 35%, it stands out as the most active in terms of deal count compared to other I&S industries, although they tend to revolve around small to medium sized assets. The buyer universe was evenly split between corporates and financial investors, predominantly from Germany in both cases.
A significant driver of deal activity in the first half of 2024 were acquisitions around storage batteries, including the acquisition of Kyon Energie Solutions by TotalEnergies and the investment by a consortium led by Porsche Ventures and Robert Bosch Venture Capital in cylib. This reflects a general trend in industrial manufacturing, as environmental considerations remain key focus areas for businesses in the industry. We see a heightened interest in manufacturing processes that shift towards more sustainability and higher energy efficiency. In general, ESG will further increase in importance for companies, both in their daily operations as value lever and as criteria during potential acquisitions.
We continue to see deals driven by the need to gain access to strategic capabilities, for example in AI and robotics. The rapid advancement in technology will continue to make these assets attractive for buyers as financial investors seek to gain access to a growing space, and corporates need to keep pace with the industry transformation by enhancing their own product offerings. An example of this is Hitachi’s acquisition of MA micro automation GmbH, a provider of robotic and automation technology, or Siemens’ planned acquisition of the industrial drive technology business of ebm-papst.
On the other hand, Siemens sale of its electrical motor and large-drive business, Innomotics, to KPS Capital Partners exemplifies of how companies are expected to continue to divest non-core assets to optimise their portfolio. Where to allocate capital, especially in a high interest environment, will be an important discussion point for industrial manufacturing companies. As a result, we expect to see further carve-out divestitures in the near- and mid-term.
For the remainder of 2024, industrial manufacturing assets should continue to attract investors and deal activity is anticipated to increase. However, a recovery to levels seen recent years will also be dependent on the development of the macroeconomic and interest rate environment.
Mid-year M&A outlook for the German Industrials and Services sector
For the second half of 2024 we anticipate deal activity to remain stable for the German Industrials and Services sector, with the potential of a rebound to previous year levels in the short- and mid-term. However, for this to materialise, the uncertainties and headwinds weighing on the sector need to subside. An easing of interest rate policy, a pickup in macroeconomic activity and clarity around geopolitical affairs would buoy transaction sentiment.
Notwithstanding these factors, we expect to continue to see a strong flow of transactions in the context of the sector transformation, with AI, automation and sustainability being the main drivers. Assets with technology or capabilities critical for the transformation will garner interest from financial and corporate investors alike. Strategic portfolio reviews will warrant corporates to acquire such assets to fill any identified gaps, while also leading to the divestiture of non-core assets. Additionally, we expect areas like professional services to further consolidate, also driven by buy-and-build strategies of financial investors.
Note: H1 2024 refers to the period January-May 2024, as at the time of writing the report June 2024 data was not available.
Contact us
German Industrial Manufacturing Deals Leader, Partner, PwC Germany
Tel: +49 151 65759394
Sven Heinemann
EMEA Value Creation Driver for Industrial Manufacturing and Automotive, Partner, PwC Germany
