MARKET TRENDS DACH M&A in 2024 - will the rising wave return?

Despite the global M&A market experiencing significant fluctuations in 2023, dealmakers in the DACH region remained resilient. They have long recognized M&A as a strategic lever, especially when companies need to adapt quickly to the changing business landscape, such as the rise of AI and sustainability, and the local market provides good opportunities. How might the year 2024 unfold?

Key takeaways:

01. DACH is expected to see a rise in M&A in 2024 due to several factors

• Presence of strong mid-market companies (Mittelstand) attractive for acquisition.
• Rise of power tech consumers driving demand for DACH tech companies.
• Stabilization of interest rates and inflation rates allowing for better deal evaluation.
• US investor interest in DACH tech companies, particularly in AI and renewables

02. Challenges to DACH M&A in 2024 include

• Company valuations potentially hinder deals due to a decrease in multiples.
• High interest rates and geopolitical conflicts are still creating a challenging business environment.

Deal activity in 2023 in DACH declined from 3884 deals in the preceding year to 2493, according to IMAA Institute, highlighting the need for adaptive strategies in the face of economic uncertainties. How could it be achieved?

As suggested by McKinsey back in February, CEOs across industries view M&A as an effective way to drive strategic growth, outperforming organic growth strategies. Judging by that, actively managing portfolios can contribute to business success, and there are good grounds for that in the DACH region, traditionally.

Firstly, the DACH region is rich in mid-market (so-called Mittelstand) innovators that could stimulate acquisitions in 2024. The rise of power tech consumers especially is propelling this strategic shift, impacting M&A tactics and the choice of targets. DACH tech companies certainly add value to portfolios with strong performance, maturity and fragmentation that favors consolidation.

Furthermore, companies in the region increasingly consider sustainability as a critical factor in M&A decisions, and aligning with ESG has now become essential.

What’s the broader context for the above? What might the challenges be?

With substantial dry powder at hand, targeting the robust small and midcap assets by larger buyers and developing them in order to create value seem achievable.

Here, similar to the rest of the world, company valuations might play the biggest role – and be one of the biggest hindrances, too. The gradual decrease in multiples is exerting stress on investments and yields in 2024 all over. This can be alleviated by focusing even more on the Due Diligence process and deeply analyzing the economic circumstances.

But even though the business environment in DACH is still challenging, driven by external factors like inflation and geopolitical conflicts, experts predict that assets which were sidelined in 2023 will re-enter the market this year, so opportunities await. Why?

What’s crucial this year is that we’ll probably see stabilization of both interest rates and inflation rates. This will allow transaction sides to better assess turnovers, hence also the company value.

Coming back to the TMT sector, the recent report by Mergermarket has highlighted a surge in US investor interest for DACH tech companies, particularly those with expertise in AI, renewables, and semiconductors. Advisors who can connect these firms with US investors are said to have a significant advantage in the M&A market.

Noticeably, Clipperton expects strong tech M&A markets to continue into 2024, which could be coupled with gradual enhancements in the fundraising landscape as investors adjust to the “new normal” and start looking for opportunities once more.

Since 2023, TMT has truly dominated the “business optimization discourse” with AI and automation, and where tech startups may have problems being risky assets for volatile times, mature DACH mid-size companies gain advantage.

Some sectors of the DACH economy are “traditionally” considered attractive as M&A targets, and in 2024 due to the reasons highlighted above they might be particularly interesting.

The aging population in the DACH region is driving demand for healthcare products and services. This includes companies developing new drugs, medical devices, or innovative healthcare IT solutions.

On the other hand, the DACH energy sector is undergoing a significant transformation driven by the need for decarbonization and energy security. This creates opportunities for M&A activity in several areas, renewables being the most important.

As DACH countries aim to increase their share of renewables in the energy mix, companies with strong track records in areas like solar, wind, or biomass could be attractive targets for utilities or energy companies looking to expand their renewable portfolios.

What’s worth pointing out is that being the biggest DACH market, Germany is planning a comprehensive reform of investment control law for 2024, with the aim of introducing a uniform investment control act. German policy on foreign investments is generally liberal, considering its open investment regime as a cornerstone of its economic development.

However, in recent years, the policy has become more restrictive in certain areas due to growing geoeconomic competition and the aim of the EU and Germany to restore technological sovereignty. This is likely to influence the M&A market, potentially making transactions more complex and subject to additional regulatory oversight, according to Noerr.

As we head into 2024, experts predict a potential surge in dealmaking activity, fueled by several key factors.

However, the road to a robust DACH M&A market in 2024 is not without its challenges. The ongoing decrease in company valuations across industries could act as a damper on dealmaking. Furthermore, Germany’s planned reform of its investment control law might introduce additional regulatory hurdles, potentially complicating the M&A process.

Will 2024 be the year DACH M&A rebounds on the back of its thriving tech sector and commitment to sustainability?