Wednesday, August 12, 2020

State intervenes in mergers and acquisitions market

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Frankfurt The corona crisis is turning the world of investment bankers upside down. In the past twelve years, mergers and acquisitions (M&A) have experienced a boom that has led to ever new records. But with the pandemic, the global market collapsed. Companies are holding back. At the same time, a new player takes the stage in the middle of the crisis with the state.

The federal government is ready to take billions of dollars in hand to rescue distressed companies like Lufthansa and buy their shares. At the same time, the state wants to protect weakened industries through participations against takeovers from abroad if they are important for Germany. “In the financial crisis, the focus was on the banks, today it is the real economy. The state participation in the defense against foreign bidders is certainly intended as an ultima ratio, ”says Jan Bonhage, partner at the law firm Hengeler Mueller, in an interview with the Handelsblatt.

Many companies are today valued favorably on the stock exchange. But the prices for many medium-sized companies are also likely to fall or fluctuate more in price, the lawyer judges. Foreign corporations and funds offer attractive opportunities here. “There are many investors who specialize in companies in difficult situations. They are happy to help in crises, ”says Ralf Moldenhauer, Senior Partner at the Boston Consulting Group (BCG).

These included hedge funds that would invest significantly more in the coming months. They not only buy up debt, but also invest in shares. There are also companies in the private equity sector that specialize in restructuring cases.

According to many experts, China is facing an economic comeback and will certainly try to make strategic investments in the coming months and years, such as the robot manufacturer Kuka a few years ago. In addition, financial investors from the United States still have high investment potential thanks to unused billions in the funds.

That is why the federal government is adopting a defensive stance that initially applies to the health sector. Economics Minister Peter Altmaier said: “We need to know about critical company acquisitions from third countries in the health sector in good time and be able to examine them. It’s not about questioning our open investment location, but we need to be able to take a closer look here if necessary. ”

The CDU politician had recently announced that he wanted to become more independent of foreign countries with strategically important products. The German politicians are alarmed at the latest after the Americans’ desires at the Tübingen biotech company Curevac, which is driving research on a vaccine against the Sars-CoV-2 virus.

Hengeler-Mueller partner Bonhage believes that the focus of the investment reviews would certainly be on critical infrastructures such as energy, water supply, IT and telecommunications, as well as critical technologies such as AI, robotics, semiconductors and biotechnology. But other health and research areas would also be included. Acquisitions are likely to be examined here regularly in the future. “M&A processes with non-EU buyers will tend to take longer overall,” says Bonhage.

For the supreme discipline in investment banking, this is not good news at a time when the market is already down. In Germany, M&A volume fell 88 percent in April on a dollar basis.

“April was no rain shower for the rainmakers as the corona virus continues to take its toll on global markets. The full scope of this global economic lockdown on the transaction market remains to be seen. It is clear that we are in an unprecedented scenario, ”says Cornelia Andersson, Head of M&A and Fundraising at Financial Information Service Provider Refinitiv.

Many transactions can hardly be planned

From the point of view of those involved, the transaction security is reduced due to the expansion of the audits in terms of industry strategy. The measures are likely to aim not only at stability, but also at maintaining technological sovereignty. The changes in the health sector – the so-called 15th amendment to the Foreign Trade Regulation (AWV) – are expected to come into the cabinet this month. After that – probably by autumn – the 16th amendment to the AWV is planned. This should deal with other lines of critical infrastructure. Here, too, according to the Reuters news agency, there should be a reporting requirement and state inspection options from an acquisition of ten percent of the company’s shares.

“This extends the range of tests. According to the amendment to the AWG, an anticipated impairment of public order or security in Germany, other member states or EU programs should be sufficient for orders, so far an actual threat has been required, ”explains foreign trade law expert Bonhage.

“With the Foreign Trade Act, the federal government has already built high protective fences in areas that are important for the German economy. This includes, for example, tightening up in the areas of automation and technology, ”analyzes Michael Heise, chief economist at the asset manager HQ Trust.

Germany, however, is not alone with its tightening. “Protectionist shields are increasing worldwide,” Bonhage said. In the United States, CFIUS procedures would be tightened, as would screening for direct investments in other EU member states, such as in Spain and Italy. The EU Commission is pressing to have a say in the cooperation mechanism of the “EU Screening Regulation”.

In addition to averting unwanted takeovers, the state also gets involved where companies have to be saved in the face of the crisis. A billion dollar rescue package has been negotiated at Lufthansa airline for weeks. How the package was composed was not clear at the start of the week.

According to investment bankers, Lufthansa and other future emergency capitalizations will see mixed forms of capital increases, convertible bonds, loans from private banks and loans from the state-owned development bank KfW. When it comes to implementing state subsidies and rescue packages, it depends on the particular situation of the company and the industry.

“But I can imagine that capital increases and convertible bonds will be used. Special situations will also provide an opportunity for new anchor shareholders to join, says a Frankfurt investment banker.

According to media reports, the federal government wanted to join Lufthansa with 25.1 percent. In the negotiations with the federal government, it was unclear until the end what proportion of the money could flow as “silent equity” – that is, without voting rights – and which one with voting rights.

The state could get two supervisory board posts. Lufthansa boss Carsten Spohr has called for state aid, but does not want politicians to talk him into the business. Lufthansa is currently losing around one million euros in liquidity per hour due to the largely parked fleet. There are also liabilities that fall due.

The state had already joined companies in the course of the 2008/2009 financial crisis, for example at Commerzbank, where it is still involved.

More: Acquisitions in the field of digitization are an opportunity for medium-sized companies – but only a few dare to

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