From Berlin to Rome: The state of cross-border M&A in Europe

Cross-border mergers and acquisitions (M&A) are vital for companies aiming to diversify and expand their market presence, while also mitigating risk. Here, Translink experts – Dr. Tillmann Bronner and Christian Fest, Partners at Translink Germany; Marc Irisson, Partner at Translink France; and Matteo Paggi, Managing Partner at Translink Italy – examine recent M&A activities and strategic prospects between key European markets.

Germany: A hub for strategic acquisitions

Germany remains a focal point for cross-border M&A, driven by its robust industrial base and strategic location within Europe. Bronner and Fest highlight that German companies are actively pursuing acquisitions across Europe and beyond to enhance their technological capabilities and expand market reach, particularly in the automotive and engineering sectors.

However, regulatory complexities and recent tightening of foreign investment regulations within the European Union pose significant challenges. “German companies must engage in careful planning and compliance to navigate the intricate regulatory landscape of cross-border M&A,” says Bronner and Fest.

Influence of the Mittelstand culture on M&A strategies

• Small and Mid-Cap Range: There is a large pool of medium-sized, family-owned companies, though many may not be transaction-ready. Owners are frequently hesitant to exit, valuing long-term relationships. This could shift as a new generation moves in. Succession-planning is pivotal. Many of these companies have significant proprietary know-how which may be attractive to foreign investors, however an understanding of the market, the mentality of Mittelstand founders, and the right approach to take is critical.

Opportunities in emerging sectors

• Science: Germany is a leader in automation and production technology, attracting investors with buy-and-build strategies. In terms of science sectors, German researchers set a global benchmark, however companies tend to be less proactive in commercialising new technologies.
• ESG is becoming increasingly important in shaping the companies’ development and activities in the specific markets. There is a growing number of new technologies-focused financial investors actively seeking buy and build targets in the German/DACH markets, which is again accelerating the German start-up ecosystem in these sectors.

International trade dynamics and geopolitical factors

• Germany’s Mittelstand companies operate in a region of relatively high political stability. Even though many German companies are familiar with international markets, the ability to speak and understand German is highly advantageous particularly in certain rural areas of Germany.
• In recent years there has also been a growing skepticism towards Asian investors, following some difficult dealmaking.
• Germany is losing international competitiveness due to rising labour costs and energy prices. This is prompting more business expansion into foreign markets, either through organic growth or acquisition.

Key regulatory considerations

• Family-owned business dynamics: Respect for the identity and independence of family-owned businesses is crucial.
• Regulatory environment: While generally open, Germany imposes restrictions in high-tech and national security sectors.

France: Embracing innovation through M&A

In France, cross-border M&A is driven by a focus on innovation and digital transformation. Irisson notes that French companies are leveraging acquisitions to integrate cutting-edge technologies and enhance digital capabilities, with significant activity in the technology and healthcare sectors. He says, “France is home of some the major tech innovation in history, including the first microcomputer back in 1973, the first music streaming service with Deezer (before Spotify and Apple Music) and many others.

“I believe French tech companies have demonstrated a solid track record in expanding outside of the French market: our IT services companies are among the largest and most dominant in the world, some of our software companies have been world leaders in their fields for years, and our satellites and launchers are still among the best. All of this because of a strong attention to detail, state of the art engineering and robust human resources.”

“In terms of cross-border expansion into France, the French market is often perceived as difficult to enter from outside. Some argue our social environment makes it difficult to prosper, but in fact France has attracted significant foreign direct investment in recent years, especially in the tech sectors. This is because France remains a country of innovation, with a strong educated workforce, efficient tax environment for tech, and because it’s a good entry point for expansion into Europe. The best way to enter the French market is to involve the local people; this means inbound M&A activity is robust over time.”

Influence of tradition and innovation on M&A strategies

• Engineering excellence: Irisson says France is renowned for its strong engineering tradition, boasting numerous prestigious engineering schools, top-tier scholars, and acclaimed research.
• International expansion: French tech companies have a strong track record in global markets, driven by state-of-the-art engineering and robust human resources.
• Inbound M&A activity: France attracts significant foreign investment due to its skilled workforce, favourable tax environment, and strategic geographic position in Europe.

Emphasis on sustainability and ESG factors

• ESG integration: ESG considerations are now integral to M&A deals, influencing information memoranda, and due diligence, and often included in financing tools – for example, lowered interest rates based on successful improvement of specific ESG factors.
• Impact on deal viability: ESG factors can impact deal viability, with some transactions collapsing due to unfavourable assessments. Conversely, having ESG as a performance metric has tremendously aided organisation’s profit, growth and success.

Cultural nuances and regulatory frameworks

• Cultural differences: French pride and strong identity play a role in M&A negotiations, often bridged through effective communication facilitated by an expert advisor.
• Foreign investment rules: France’s foreign investment regulations protect strategic assets, aligning with common practices among major countries, while still maintaining a welcoming stance towards mergers and acquisitions and foreign investment.
• Employee notification requirement: After acquiring a controlling stake in a French company, all employees must be informed and offered the opportunity to acquire a stake in the company – however, owners are not obliged to provide information or accept it – it’s mostly an administrative step to comply with.

Italy: Diversification and risk mitigation

Italian companies are increasingly engaging in cross-border M&A as a strategy to diversify their production and mitigate risks. Paggi explains that Italian firms are targeting acquisitions in both Eastern and Western Europe, with a particular focus on Germany, France, and Spain for business diversification. The US market has also become highly attractive, with several mandates being directed towards acquisitions in the United States.

Paggi emphasizes that while acquisitions in Europe are relatively easier due to cultural similarities and logistical advantages, the US market presents unique challenges due to its distance and regulatory environment. “Italian companies are recognising the immense potential of the US market and are strategically positioning themselves to capitalise on it,” he states.

In terms of industry-specific trends, the energy and environmental sectors in Italy are witnessing significant M&A activity, driven by the need for innovation and sustainability. Private equity funds are playing a crucial role in consolidating these fragmented sectors, creating platforms for growth and expansion.

Moreover, Italy’s food and beverage sector, renowned for its culinary excellence, is also active in the M&A space. While large companies continue to pursue acquisitions to expand their market presence, medium and small enterprises face challenges in scaling up and maintaining their regional specialties. Succession planning and brand integration are critical issues that need to be addressed to ensure the sustainability of these family-owned businesses.

Cross-border M&A shows no sign of slowing down

The cross-border M&A landscape in Europe is dynamic, with Germany, France, and Italy each exhibiting unique trends and challenges. German companies leverage strategic acquisitions for technological enhancement, French firms focus on innovation and digital transformation, and Italian businesses seek diversification and risk mitigation. As these markets evolve, cross-border M&A will continue to be a key strategy for growth and competitiveness. Translink Corporate Finance’s team of global experts – with deep industry knowledge and local market insights – help businesses get their cross-border deals done.