Coming to stay: Special aspects of acquisitions by Chinese investors

 

 

Earlier, German enterprises feared that if Asian investors acquired German companies they did it only to vacuum off the know-how, close and move production overseas. This fear is however often unfounded. According to the experience of Michael Wiehl, Attorney at Law and Partner, Leader of the International Transaction Practice at Rödl & Partner in Nuremberg, more and more Chinese companies are currently buying into German companies to set up or expand production in Germany and apply the existing know-how also to their local markets.

 

Chinese investors often focus on the so-called “hidden champions”, i.e. companies that are the market leaders in their respective industries due to their highly specialised technical know-how, are often owner-managed and therefore have only limited brand recognition among the public. Takeovers are often tied to the investors’ goal to fill their own technology gaps in the shortest possible time without having to go through lengthy development processes and to shorten the cost-intensive process of building up their own brands.

 

Hidden champions and also other companies that Chinese investors are particularly interested in can be found in Germany especially in industries such as mechanical engineering, automotive suppliers and health technology. The sizes of target businesses range from small special-purpose machinery construction companies boasting annual revenue of EUR 15 million to large automotive suppliers generating several hundred million euros in revenue. Irrespective of the size, investors seek for three things in a business: a good team, a good product, and a well-positioned company. “It is the unity between production and know-how of employees that the Chinese investors are after”, says M&A expert Michael Wiehl. According to his observations, they are attracted to the synergy between organisation, personnel, and high-quality procedural know-how.

 

It is a combination that cannot be transplanted overseas just like that. However, with taking over a strong German manufacturer, the Chinese market can be supplied until production facilities set up based on the German model reach the global market level.

 

Currently, the largest part of Chinese buyers are state-owned enterprises and listed companies that are not interested in lucrative exits but in continuing operations and expanding their business. Chinese investors that typically use services of private equity investors to buy into companies or acquire companies only to exit after several years and cash in the profit are rarely among those interested in buying German companies. However, it should be expected that this will change in the future, especially since the number of Chinese private equity companies has recently increased in Germany.

 

However, it is important to be mindful of the effects that the more rigorous investment scrutiny in Germany will have on company acquisitions by Chinese companies. It cannot be ruled out that a company acquisition by Chinese companies will encounter regulatory difficulties. It remains to be seen, however, whether this will result in fewer Chinese state-owned enterprises investing in Germany in the future.

 

The fact that buyers are usually state-owned enterprises or large listed companies leads to a situation where sellers don't have to worry about their credit worthiness. The necessary capital to acquire companies is usually available. Complex debt financing or other financing structures are therefore generally not necessary.

 

The fact that enough capital is in place does not yet mean that buyers from China will spend lavish sums. Quite the opposite. “When there's money, there's close scrutiny”, says Wiehl drawing on his experience. This applies not only to prices and adviser fees, because also acquisition negotiations are shaped by Chinese buyers' great need for control and a fear of being outsmarted.

 

Thus, buyers closely watch German advisers reviewing the prices instead of letting them simply do their job. Buyers engage translators to extensively translate contracts and documents drafted in German and introduce own suggestions to those contracts. The aim: to have supposedly even better protection as an investor. So far, they haven't quite understood why their wish to talk to employees of the target company earlier has been refused for confidentiality reasons.

 

For such partially culturally driven differences not to turn out to be deal breakers, good advisory services are required. “Here, you need to know how to walk on eggshells to show to the buyers that their rights are safeguarded even if not everything can be arranged according to their expectations”, says Wiehl. Sellers, on the other hand, should check whether their strategic corporate goals are in line with those of the buyers. Only if expectations on both parts meet will the transaction prove successful for both parties.