Nicole Englisch, Partner at international law firm Clifford Chance sits down with Ansarada to discuss her deal predictions for the EMEA region in 2022.
ESG due diligence has now become an integral part of the dealmaking process.Nicole Englisch, Partner, Clifford Chance
Ansarada: Global M&A levels are clearly very high at the moment. Do you expect activity to continue over the next year or so?
Nicole Englisch: We expect activity to remain high or even increase further. During the pandemic, we saw a slowdown in Europe, particularly in Germany. While
activity increased in the third and fourth quarters, dealmakers are still having to play catch up. While we were looking out for a little slowdown in Germany due to the recent elections, this failed to materialize.
Ansarada: You say you expect M&A levels to remain high. What sectors do you predict will be driving the market?
Nicole Englisch: I see these mainly as the sectors which were already dominant pre-pandemic – in particular healthcare, med-tech, software and IT. I have seen very few deals in the past two or three years which didn’t have some sort of tech focus or impact. And digitization has now become a tool to improve M&A processes, carrying the potential to transform the way deals are carried out.
On top of these trends, I expect to see an increase in distressed M&A in Germany. So far this has been limited due to a high level of government support. Yet once this support begins to wind down in the near future, I expect to see an uptick in distressed M&A as well as carve outs and spin-offs.
Ansarada: In terms of distressed M&A, in which sectors do you expect to see a rise?
Nicole Englisch: I think automotive suppliers may become a key target, simply because they have suffered a lot amidst the pandemic. The travel industry – from airplane production to hotels and cruises – was also hit hard.
Ansarada: Moving on to the sponsorship side of things, we have witnessed dry powder reaching a record high. Do you expect the sustained level of private equity that we have been seeing to continue?
Nicole Englisch: There is so much money still in the markets, which will continue to drive activity. And the deal process has become quicker, particularly for private equity players. Private equity firms have also come under pressure from a different kind of capital. This year, SPACs had a big impact, especially on the US market, and started to gain visibility in Europe, not just with US-listed SPACs targeting European firms, but SPACs establishing themselves on European stock exchanges – such as Frankfurt and Amsterdam.
These European-listed SPACs have the potential to drive the continent’s dealmaking scene over the next two years. And they have a short life cycle, which means they have to invest their money within 18 or 24 months. However, the market is volatile and the US SPAC market has significantly cooled down recently – it looks like such cooling-down has also hit the European SPAC scene. So while SPACs have the potential to put pressure on private equity investors, it does not look like this will happen on a large scale.
On the strategic side, a key driver of activity is to gain scale in order to avoid being eaten up by large competitor firms in the US and Asia. This is another trend which will drive strategics to carry out M&A transactions in the right sectors.
Ansarada: You mentioned some key drivers of activity, such as the need for strategics to gain scale. What other drivers do you think there’ll be in the market pushing M&A coming into 2022, and possibly even beyond?
Nicole Englisch: Financing is still cheap, making life easy for both private equity firms and family offices. We are seeing many more PE players in the market compared to ten years ago. Another clear trend that has developed over the past 12 months and is impacting the dealmaking process is ESG. Companies which have a good ESG profile have become much more attractive deal targets. As a result, ESG due diligence has now become an integral part of the dealmaking process – something we did not see even a few years ago.
Ansarada: If we look at both strategics and sponsors, what are the risks they face looking ahead to 2022?
Nicole Englisch: Pricing is still a major issue. For the right target, the price is really, really high – particularly for IT, pharmaceuticals and healthcare companies. This means that overpaying has become an issue, at least for those PE players who want to see high returns on their investments. But this is something which has been the case for the past four or five years – multiples are simply very high.
Political tensions also remain a challenge. From an M&A perspective, foreign investment regulations are always important, driven in part by political tensions between China and countries within Europe or the US. I think that this will continue to impact the M&A market going forward. Foreign direct investment has been under increased scrutiny over the past two to three years, and I expect this to continue in the future.
Ansarada: This brings me on to my next question. What are the major regulatory issues that you see as being the most disruptive for dealmaking?
Nicole Englisch: It depends on the parties involved. If a Chinese party is involved, it’s typically issues regarding government regulations of foreign investment. Yet if we are working with the big industrial players, it’s often antitrust laws for merger control.
An example took place a few years ago, when Siemens and Alstom tried to merge their trains businesses but were prohibited by the European Commission due to competition law. I expect this issue to come up more and more as European industrial players look to gain scale in order to compete with US and Chinese competitors. This will be a hurdle for dealmaking, as scrutiny by European bodies tends to be higher than in other regions of the world.
Ansarada: Do you see any kinds of threats or surprises that may come up for dealmakers that aren’t currently on their radar?
Nicole Englisch: It’s a really big question – no one could have predicted the pandemic, for example. I do think that ESG considerations will dictate a lot of M&A activity going forward, be it through investment in green businesses, or activist activity.
We’ve recently seen environmental associations claim that German automotive manufacturers have to stop producing combustion engines earlier than requested by law, and that oil and gas companies stop developing new oil and gas fields earlier than required. These trends will drive transactions going forward as businesses solely producing or supplying parts for combustion engines will vanish from the European landscape. However, I do hope there will be fewer black swans or big surprises in the deal market going forward.