M&A across EMEA at large had a slower start to the year compared with both 2023 and 2022, but figures for this year so far are starting to show promise: although volume lagged with a 14% decline YoY in H1, deal value saw a significant 30.6% surge (Deal Drivers: EMEA HY 2024).

Capital is being deployed at a decent pace, with a notable increase in blockbuster deals, which suggests a strategic re-calibration among corporate buyers, with many capitalizing on improving market conditions to pursue transformative acquisitions. Anticipated interest rate cuts in Europe were finally met in June when the ECB lowered its key rates by 25 basis points, stoking hopes of more easing to follow, bolstering investor confidence and somewhat improving access to deal financing.

What does this mean for DACH, and in particular the in-dustrials and automotive sectors? Both markets appear to be poised for more M&A across the whole region. For in-dustry-heavy markets like Germany, an increase in oppor-tunities in both sectors would be a welcome change. And it will be interesting to see how the automotive sector responds as it shifts to battery-powered and software-de-fined vehicles.

1. Industrials: Renewed energy for M&A

Europe’s industrials sector has been managing its fair share of issues over the past two years, but there are encouraging signs to be found. The MSCI Europe Industrials Index, for instance, was up 12% in H1 2024 – and gained more than double that price rise since November. Sectors tied to renew-able energy, smart manufacturing, and infrastructure de-velopment continue to attract significant capital inflows. Nearshoring and reshoring are further catalysts for M&A as companies look for opportunities to vertically secure their supply chains, after the pandemic and conflict in Ukraine exposed vulnerabilities.

Deal volume in EMEA’s industrials and chemicals (I&C) sector decreased by 15% YoY to €53bn in H1 2023 from €61bn as acquirers pursued larger-ticket transactions. The second quarter delivered particularly strong performance in deal value terms, generating €36.bn, a 40% QoQ gain.

The sector’s value recovery was even more pronounced when looking at PE activity. Deal volume fell by 21% YoY to 217 buyouts in H1, significantly trailing corporate vol-ume, but aggregate deal value surged by 52% to nearly €10bn. Financial sponsors are focusing on segments that benefit from the secular trends of decarbonization and digitalization, which continue to offer considerable growth opportunities in an otherwise lethargic sector (Deal Drivers: EMEA HY 2024).

The industrial manufacturing and business services sectors (IM&A) saw the most deals last year, accounting for two-thirds of overall deal activity in the German IM&A industry. And the IM sector had a 35% increase in activity from 2022, the highest increase across sectors. Going forward, the DACH market offers a lot of potential in general, with 343 reported deals in the making. I&C languished in Q1, reflecting Germany’s industrial torpor. These transactions totalled close to €3bn, half their reading in Q1 2023. But at H1, the sector is leading the charge in the subregion, with 94 potential transactions (Deal Drivers: EMEA).

2. Automotive: Driving change and opportunities

And what about M&A in the automotive sector? In Q2, there were a reported 33 automotive M&A deals announced across Europe, worth a total value of US$1bn, up both QoQ and YoY. In Germany, however, the automotive sector saw a 7% decline YoY in deal activity, the biggest decrease among the IM&A sectors compared to the previous year.

The shift to electric vehicles (EV), could further boost deal-making opportunities in the sector. However, this shift means increased costs on original equipment manufacturers and suppliers – which could mean more industry consoli-dation. The used car market might present some opportu-nities, albeit in the distressed M&A market, due to the low resale value of EVs.

Per a recent report, “The extensive capital requirements to fund this transformation naturally [lead] to questions around the need for consolidation. This is becoming even more critical as original equipment manufacturers (OEMs) face constrained demand due to the economic climate and a real need to cut costs, particularly on electric vehicles (EVs), to drive sales volume. Two key areas expected to wit-ness this trend are PRC EV OEMs, as China manages excess domestic supply by driving consolidation and potentially the small-car EV market, as European OEMs in particular look to deliver the 'holy grail' of affordable EVs at acceptable margins in the face of considerable competition from the PRC OEMs.”

The competition from China is real. Germany’s auto giant Volkswagen reportedly has been losing market share in China, its single biggest market. And the recent news that the company is “struggling with a slow EV transition and falling consumer demand in Europe”, resulting in possible factory closure and cost reductions, is worrisome for the in-dustry as a whole.

EV start-ups have also struggled financially, underesti-mating the amount of capital needed to sustain opera-tions and unexpected expenses, leaving them short of cash. Earlier this year, one EV maker even filed for bank-ruptcy, after several others had already succumbed to the same fate.

Additionally, there are environmental and social risks around mining lithium, the key component of lithium-ion batteries, which are used to power most EVs today. These concerns can make EV M&A deals riskier and harder to complete.

Still, investors, especially PE firms, have large amounts of unallocated capital and want to deploy it. Strategic and fi-nancial buyers are also looking for ways to expand in the transportation sector and are expected to use strategies such as M&A to gain or increase a foothold. This may help ex-plain why M&A deals in the broader industrials sector, of which automotive and transportation are part, have climbed on Datasite, which annually facilitates nearly 15,000 deals.

In the first half of this year, industrial sell-side deals on Datasite were up 14%, with industrials being the second-most active sector behind consumer sell-side deals. Since this activity represents deals at their inception rather than publicly announced, it provides a good indication of what’s to come in the next six to nine months. In other words, ex-pect waves of deal announcements now through the end of the year as bumps in activity move through the M&A pipeline.

So, while EV M&A may be off, there are some clear signs of activity in the industry’s subsectors. The continued economic recovery, and technological advancements, may drive more M&A in the latter half of the year and into 2025.

Dealmakers and stakeholders in the automotive sector should remain vigilant, adaptable, and focused on due dili-gence processes, leveraging opportunities as they arise while navigating the complex landscape of economic chal-lenges. This way, they can position themselves to capitalize on opportunities, while simultaneously driving long-term growth and innovation throughout their organizations and industry.

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