Investment Platform China | Takeovers of German Companies by Chinese Will Increase

Mar 2021

Originally published by Investment Platform China on March 23, 2021.

As an investment bank, Lincoln International supports company owners with structured sales processes and approaches potential buyers in China. Interested Chinese parties comprise private companies, listed corporates and also state-owned conglomerates. In an interview, the Country Head of Lincoln International in Germany, Dr Michael Drill, discusses the development of the German-Chinese M&A market. As he notes, company takeovers by Chinese have declined in recent years. In the medium term, however, he expects a sustainable increase.

Investment platform China / Germany: Recently, company takeovers from China have subsided. How active are Chinese buyers still in the German M&A market?

Drill: We expect that M&A deals between German and Chinese parties will noticeably increase again. In the coming years we count with approx. 40 acquisitions annually of German companies by Chinese. In recent years, the Chinese government strongly regulated capital export in order to make sure that funds were invested in the homeland. This supported the decreasing economic growth in China and the move closer to the long-term goal of a self-sufficient economy. Due to the trade dispute with the United States economic growth rates came done significantly. Since autumn 2020, however, the economic sentiment in China has recovered unexpectedly quickly from the corona virus crisis. For 2021, 8% growth of the gross domestic product is expected. This strong increase, together with the dual-circulation-strategy of the People’s Republic, supports the willingness of Chinese politics that large corporates acquire European companies with special technologies and know-how to significantly strengthen their own business.

Should we expect a sell-out of the German economy to Chinese state-owned enterprises?

Drill: No. In the last ten years, the Chinese have made a total of 10 billion EUR in acquisitions and direct investment in Germany. In contrast, German companies in the same period of time have invested more than nine times this amount in China, especially for greenfield operations and joint ventures.

Are German companies currently on top of the priority list than companies from other European countries?

Drill: Yes. We see continued strong interest in industrial companies. Acquisitions such as the robot manufacturer Kuka and the special machinery manufacturer KraussMaffei by investors from China are determined to be only the beginning. In fact, two and a half years ago I advised on the sale of the Saxon aerospace supplier, Cotesa, to the Chinese AT&M Group. That was a transaction, in which the technology and the unique know-how for the production of high-quality fiber composite components stood in the foreground.

Does the German government want to prevent such takeovers with the recent tightening of foreign trade regulations?

Drill: Our German politicians are concerned that government-guided investment programs such as “Made in China 2025” might not be in line with the interest of the Federal Republic of Germany. Therefore, it was not surprising that in December 2020 the acquisition of German communications technology company IMST by the Chinese state weapons manufacturer China Aerospace Industry Group was prohibited by the German Ministry of Economy. In 2018, our politicians vetoed for the first time in a similar case, the acquisition of Leifeld Metal Spinning by an investor from China.

In which cases do you expect transaction issues in connection with the foreign trade regulation?

Drill: If target companies act in really critical technologies which are important for the security of supply for the unified armed forces of Germany or which make decisive contributions to maintain the internal security of our country the required approval by the German Ministry of Economy is in danger. In practice, however, this should only affect a few deals.