With an economy that is expected to contract by 5.4 per cent this year, according to the European Commission, Germany has not escaped the global downturn. “It is fair to say that overall deal activity has gone down by 40 to 50 per cent from a year ago,” says Dr Carsten Risch, managing partner of Ernst & Young Corporate Finance Germany.

With an economy that is expected to contract by 5.4 per cent this year, according to the European Commission, Germany has not escaped the global downturn. “It is fair to say that overall deal activity has gone down by 40 to 50 per cent from a year ago,” says Dr Carsten Risch, managing partner of Ernst & Young Corporate Finance Germany.

Although fewer German banks were as profligate as their UK and US counterparts, “there is a liquidity crisis, and banks are being cautious”, comments Christian Kollmann, partner at M&A consultancy Interfinanz. It is not only the lack of finance that is preventing deal flow, argues Risch: “In this environment, it is very hard to value businesses, so there is a gap between sellers’ price expectations and those of the buyers.”

Despite the deal drought, small and medium-sized enterprises (SMEs) in Germany – the renowned “Mittelstand” – remain active. According to figures compiled by the Institute for Mittelstand Research, Germany has some 3.4 million SMEs, which provide 70 per cent of the country’s jobs.

While many attribute the move into specialist products and services as a major factor in the competitiveness of SMEs, there are other reasons why the sector remains buoyant. “Unlike large corporates, Mittelstand companies tend to operate in a less leveraged environment,” says Hanno Hepke, partner at Ernst & Young Corporate Finance Germany. This helps explain their relative health, as, unburdened by debt, “they are often still able to raise finance”.

SMEs are also given a helping hand by the German banking system, in which large international banks, typically clustered in Frankfurt, compete against a network of regional banks, many of which have strong ties to local businesses.

As Hepke points out: “These local and regional banks were much less active in the derivatives dealings that helped bring the system down.” Even as the large German banks struggle to provide fresh capital to businesses, local banks are often able to extend loan facilities to mid-sized companies.

Equally, as the lack of credit leaves private equity houses in the cold, SMEs are in a good position to take advantage of depressed values, and can structure deals that may have been out of reach a year ago.   

Kollmann notes: “This is a perfect time to make a deal in Germany. Price expectations are at a more realistic level and German companies are well positioned in the world market.”