Hengeler Mueller’s Hans-Jörg Ziegenhain: Green shoots emerging in German M&A

In this excerpt from our 2025 European M&A Outlook Report, which features insights from 12 leading European dealmakers, Hans-Jörg Ziegenhain, Partner at Hengeler Mueller, discusses the optimistic outlook for M&A in Germany, the exit environment, and volatility and variations in valuations. Deep dive into Hans-Jörg’s insights below. 

Global M&A activity in 2024 was on the rise – certainly in value if not volume terms after a disappointing 2023 – do you expect more activity and how do you view the European M&A market for the next 18 months and beyond? 

I am cautiously optimistic. We have recently seen a pick-up in M&A in Germany. Two major transactions were announced recently: ADNOC’s takeover of plastics manufacturer Covestro and the acquisition of energy meter maker Techem Group by [private equity group] TPG and [Singapore sovereign wealth fund] GIC. On top of this, Deutsche Bahn just signed the sale of logistics business DB Schenker to Danish transport and logistics group DSV – a significant transaction valued at around US$15 billion. These recent deals may pave the way for more to come.

The timing of these deals is interesting. While there have been rumours circulating for a while, we were not quite sure when the parties concerned were going to pull the trigger. The fact that deals are completing is a good sign, both in terms of the health of the markets and availability of financing. 

The Schenker deal was financed almost entirely through a bridge financing mechanism, followed by a successfully placed capital increase. It is good to see these types of mechanisms working, and their success will hopefully encourage further deals.

Do you expect greater levels of protectionism and foreign direct investment (FDI) scrutiny globally in 2025? How should dealmakers prepare for potentially more complex transactions?

Back in 2016, Germany had almost no FDI controls. While certain controls were in place they were rarely relevant in practice. Today’s climate is different. There are hardly any larger deals which do not fall under FDI control. This is not only the case in Germany, but all over Europe and many other jurisdictions across the globe. 

Dealmakers need to develop ways to adapt to the current climate. They have gained experience over the past years. In terms of expectations, we need to predict how governments will react to a certain transaction. We have certainly improved compared to, say, a few years ago. Break fees, for example, can be structured differently today in order to take FDI risk into account.

While antitrust risk has a long history of legal practice and jurisprudence, this is not the case for FDI risk. The situation is improving slightly, and we now have a better feeling for whether a deal will complete or not. We have learnt to adapt to the new normal, and I don’t think we’re going to see a loosening of FDI restrictions any time soon. 

What do you view as the major opportunities and challenges for PE firms going into 2025?

Let's start with the opportunities. The Schenker sale was a highly competitive process with both corporate and private equity interest. It presented a strong investment opportunity with certain untapped potential to transform it into an even more profitable business. Also distressed assets, or those with an element of distress, will continue to provide solid investment opportunities for investors going forward. 

In terms of challenges, exits are proving a sticking point for PE firms. Since numerous past IPOs were not as successful as hoped for, in particular stock prices not being robust after the companies having been floated, exits for financial sponsors proved to be difficult. This means that, if a PE firm is sitting on, for example, an 80% stake, they may need to sell this below the initial IPO issue price. According to certain market observers, this is also the reason that we are seeing fewer IPO exits and an increasing backlog of deals. 

Have you seen valuation multiples drop over the past year? If so, has this led to a mismatch in price expectations between buyers and sellers? How can dealmakers overcome this? 

There are various tools available for dealmakers looking to close the valuation gap. Earn-out deals have risen in popularity over recent years. The upfront value of the deal is reduced, and the remainder of the purchase price is paid once, based on the asset’s performance over time. We are seeing these types of mechanisms used regularly within the current deal climate. 

Valuations inevitably vary across sectors. Prices in certain high quality healthcare assets, for example, remain elevated. We are seeing the opposite in the automotive sector, with multiples dropping strongly depending on the type of asset. This volatility is causing new players to enter the market – funds looking to take assets apart. Their logic is that the sum of a business’ parts can exceed the company's value as a whole.  

In auctions of the past, we may have seen between 10 and 15 large cap players in the first bidding round. This is rarely the case any longer. Instead, we are witnessing various deal specific funds entering the bidding process, as the market is far more differentiated compared with some 10 years ago.