Germany’s economy has continued to grow at an impressive rate, outstripping all of its European neighbours with GDP growth of 0.5 per cent from January to July 2018. It remains the fourth-largest economy in the world by nominal GDP, and accounts for 28 per cent of the Eurozone’s economy as a whole. The German economy’s specialisation in the export of capital goods has benefitted from a global upswing in demand in this area, and the ease of access to credit. There has also been a boom in the German labour market that has seen unemployment at record lows, which has positive consequences for domestic consumption. As such, the German economy appears to have been largely unaffected by Brexit uncertainty and the potentially destabilising effects of the “tariff wars”, with the OECD projecting that growth will continue into 2019. The strong performance of Germany’s economy has translated into a very active legal market on several fronts.
Given the strong performance of Germany’s economy and historically low interest rates over the last three years, there has been a continued boom in M&A activity in the domestic market, with practitioners reporting a higher volume of deals valued between €500 million and €1 billion in the last year. It is a seller’s market, with a high level of capital saturation, report practitioners, and with transactions taking place at highly accelerated rates and featuring an influx of international investors. When breaking down the M&A activity by sector, over the past two years, the cash-rich energy sector has superseded the automotive sector, in part due to the entry of private equity and venture capitalists attracted by the second generation of energy technology such as smart grids and wind farms. M&A activity is also being driven by blue-chip companies chasing innovation by absorbing promising start-ups and establishing technology incubators of their own. Indeed, seemingly the only limit to M&A activity in Germany at present is the lack of targets for investors to direct their capital towards.
The lively state of the M&A market has produced an intensely competitive domestic legal market in Germany in recent years. Sources told us that local German firms are struggling to compete against global firms for M&A work due to their smaller international footprint. Indeed, the highest-value M&A work is still divided between five or six international firms who can offer the expertise in English and American law that such a clientele needs. Consequently, the legal market has also seen a “shopping spree of lateral hires” as firms seek to retain a competitive edge. Respondents also noted that clients have become stricter in their attitude toward fees, which has opened another dimension in which firms must now compete for M&A work. Increased competition regulation from the EU and the domestic Federal Cartel Office has also affected activity in the M&A market this year, with large companies forced to sell assets and divisions in order to avoid falling foul of antitrust regulation.
In a regulated M&A market, as the volume of M&A work increases, so too does that of competition cases. Sources reported this year that cartel and private damages work is “going crazy” in Europe, with cases valued at over €200 million now a regular occurrence. This is not all down to the gold rush of M&A work in recent times, however. Practitioners also point to a more gradual process of cultural change over the past 10 years surrounding private damages and cartel work as part of the reason for the increase in competition work. Simply put, private damages cases “did not exist 10 years ago”, but now this area of the legal market is “very, very hot”. Practitioners put this down to a reduced stigma surrounding the pursuit of damages claims in the business world in Germany, and legislation that has made such claims easier to pursue.
The rise of competition work in Germany has also been driven by the increasingly aggressive stance of EU and domestic competition authorities in recent years. This has manifested in several ways, from an increase in vertical price maintenance cases that were “unheard of” 10 years ago, to well-publicised investigations of large companies such as Google. The exponential expansion of digital business in recent years has also brought a new angle to competition work in the German market, and often presents new complexities for practitioners to navigate. The digital revolution and the attractiveness of such businesses has not only increased the number of potential buyers but also diversified their geographical location, further emphasising the need for firms with international expertise.
The German real estate market has been another beneficiary of the strong economy and the M&A boom, with “relatively stable” prices and levels of activity for the last year, according to commentators. This comes despite uncertainty over Brexit, which was initially seen as a struggle between London and Frankfurt for predominance as the location for headquarters of top financial institutions. However, practitioners now report that it is not such a simple dichotomy, with companies moving to Amsterdam and Liechtenstein as well. Sources told us that both Frankfurt and London are still viable options, and although there has been an influx of businesses into Frankfurt seeking to rent office space, London appears to remain the financial centre par excellence in Europe. The real estate market has not escaped the ravages of digitalisation, with a number of physical retail and shopping centres folding due to inroads made by online retailers. However, the rise of digital retailers has generated demand for distribution centres for their supply chains in Germany, which is stepping in to fill the void left in the market by traditional physical retailers.
Reports of Germany’s current economic golden age and the highly active legal market are frequent and largely optimistic. However, some specialists couch their assessments in caution. With the specific terms of Brexit still to be ratified, an escalation of tariff wars between the US and the EU, and the high levels of debt in the European financial markets, some predict that Germany’s 10-year halcyon period has an end in sight. A downturn in Germany’s and Europe’s economy as a whole is expected in the near future by practitioners across many practice areas. However, if and when it occurs remains to be seen.