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  1. Outlook: M&A drivers and dampeners

DAX/MDAX M&A survey

Outlook

M&A dampeners

The economic and geopolitical climate will continue to make M&A more challenging as interest rates are higher, financing is currently more difficult to arrange and investors and lenders continue to re-assess valuations, projections and return expectations.

In addition, global markets have become more fragmented, driving regulation and tightening of merger control and foreign investment regimes. Therefore, the economic and geopolitical climate will also continue to make M&A less predictable and more challenging.

M&A drivers

This being said, there are signs of recovery in the debt market and still high levels of dry powder sitting with institutional and private equity investors. These will seek to benefit from lower valuations and from accelerated exits and consolidation in sectors where funding options continue to be limited.

Equally, cash-rich corporates will continue to deploy capital, invest in their supply chains and drive consolidation.

“Companies will continue to rationalise their portfolios, inluding by divesting or spinning out non-core businesses,” says Freshfields Partner Theresa Ehlen. “Separating businesses can also help to obtain standalone equity and debt financing.”

Digital transformation and ESG as additional drivers

We expect the relevance of ESG and in particular the shift away from carbon-intensive business models in transactions to continue to grow, both as a driver of M&A (for example, through companies investing in new technologies and capabilities in the waste management or energy consumption space, or divesting businesses which are no longer in line with their sustainability strategy) and as an additional focus area in due diligence.

“Those who do not invest in ESG are not only putting the company’s reputation at risk, but also the future prospects and even financial viability of the company – as well as their own career prospects,” says Freshfields M&A Partner Christoph H. Seibt.

The data also shows that M&A as a means of accelerating companies' digital transformation has rapdily risen up the corporate agenda in the past few years, with DAX and MDAX companies’ investments in digital markets now outpacing investments in other industries (despite very few of these companies being tech companies themselves).

“The life sciences and tech/digital sectors in particular are expected to be relatively robust. We will continue to see strong M&A activity in these areas,” says M&A Partner Lars Meyer.

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