Will Bankruptcies Drive M&A in Germany?

Will Bankruptcies Drive M&A in Germany?

My “big law” mates have been predicting a surge in M&A activity in 2010 for quite a while now. (They did foresee the same for the second half of 2009 and quickly set their sights on 2010.) So far nothing has happened – again. And indeed, some have already given up on 2010 altogether. Nevertheless, two recent data points are well worth looking at: working short-term and German bankruptcies. The combination of the two could well lead to an increase of target companies, especially, in the buyers’ market for small strategic deals and distressed asset deals in 2010.

Bankruptcies 2009 and 2010

Bankruptcy numbers in 2009 have been surprisingly stable. The last official number, to my knowledge, was 30.104 as of November 2009 according to the Federal Statistical Office (Destatis; last updated on the 10th of February 2010). Unofficial figures suggest 34.300 cases for the calendar year of 2009 or an increase of 16 percent percent year-over-year. For comparison: The Destatis numbers on bankruptcies for 2007 and 2008 were 29.160 and 29.291 respectively. Estimates for 2010 see bankruptcy cases at 40.000 with an increase of 16,36 percent year-over-year. It looks as if the ratio of 2009 compared to 2008 (16 percent) has simply been reapplied (16,36 percent).

I am afraid that is too simple an equation. I reckon far more cheap targets and assets could hit the M&A market though bankruptcy. Why? Check out this graph on short-term work.

Source: http://www.pub.arbeitsagentur.de/hst/services/statistik/interim/arbeitsmarktberichte/berichte-broschueren/arbeitsmarkt.shtml

Working Short-term

Source: http://www.bmas.de/portal/33884/a848__kurzarbeit__flyer__en.html

In May 2009, almost from one day to another, more than 1.500.000 workers were “pushed” into working short-term. The graph looks absolutely insane. You might have guessed it, public policy was behind that one. The rules for short-term work were substantially changed in the light of the financial crisis. The short-term allowances granted by the government were extended from six to 24 months in 2009 and currently run for 18 months max. Of course, companies jumped at the opportunity last year and took the life-line instead of filing for bankruptcy.

Recent unemployment figures for Germany suggest that about half of these workers have exited short-term work for good (FAZ, Hamburger Abendblatt, BusinessWeek). However, many comparatively healthy companies have taken advantage of the government aid, too, and have exited by now. The more critical companies are still on the government’s life-line.

In other words we are pushing a big wave of some 800.000 workers ahead of us in companies in critical condition. My colleagues from restructuring tell me that the local job agencies are deeply worried about the future of these workers on short-term work. If this is true the German unemployment figures of February 2010 have been received too optimistically. If this is true we will see a drastic increase in bankruptcy cases in Germany in 2010.

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