M&A in Germany: the perfect foreign investment?

By Richard Hoffmann,  ECOVIS Beijing

Mid-sized German businesses are a hot takeover target for Chinese companies. German business is known for its innovation and product integrity, a natural match for China’s large market and manufacturing prowess. As this relationship becomes more apparent, Chinese firms are increasingly looking to Germany when they need a new product or new production capability. Investments in Germany increased from 46 to 68 million euros from 2012 to 2013. Private equity has also turned its eyes to Germany as an attractive investment acquisition to eventually sell on to Chinese firms.

All of this comes at the same time as a management revolution in Germany. Mid-sized businesses, often run by families passed down through the decades, are not something children are willing to take from their fathers. This management gap creates a natural opening for new managers and new business owners.

With the changing management landscape and naturally complimentary core competencies, the German government supports foreign investment. The Chinese five year plan calls for Chinese firms to look outside of Chinese boarders for new products to manufacture in China. Both governments see the advantages that these mergers can bring.

It should be noted that the new trend in acquisition is not for the management to be thrown out and factories stripped and reassembled in China. Instead Chinese firms will maintain business in Germany and only copy processes from Germany in China.

Ecovis-Beijing has an extensive network of German firms available for introduction to Chinese firms. The following primer walks step by step through the acquisition process of a German firm by a Chinese firm.

Identifying a Target

The Chinese firm (buyer) must locate a desired acquisition target in Germany (seller). In an acquisition, the target company should be either engaged in business that can be improved by the core competencies (supply chain, management, expertise, or otherwise) of the buyer, or the target company should have core competencies that can work in synergy with the buyer to maximize quality or output. Identification is often contracted out to a consulting firm such as Ecovis-Beijing.

Example

A large Chinese auto manufacturer may seek to acquire a German high-precision manufacturer because they desire to secure high-quality, high technology tools for the automotive business. The Chinese firm would find a desired target in Germany. Initial contact would be made and the acquisition process would begin with a non-disclosure agreement.

Initiating the M&A Process and Due Diligence

A letter of intent and a non-disclosure document are signed locking the buyer and seller into a private “date”. This process will throw around a ballpark price range and the process of due diligence will begin. Due diligence is a formal examination of seller by buyer (to make sure the seller is as attractive as the buyer assumed), as well as examination of buyer by seller (to make sure interests of the shareholders are met by engaging the buyer).

Example cont’d

The automotive manufacturer and the component manufacturer would meet. The automotive company would examine the supply chain, manufacturing components, management, legal standing, and tax standing of the component company. The German component company would meet with management of the Chinese buyer, examine financial ability to pay, and examine the legal and tax. A third party would lead these proceedings. A more thoughtful and more specific valuation comes over the course of due diligence.

Pricing and Business Transfer

Simultaneously with the due diligence process, price negotiations will continue, as well as an agreement upon the means of transfer (assets or shares), acquisition vehicle, and financing of the deal (equity or debt). This conversation culminates in the post-due diligence pricing of the company.

Example cont’d

During due diligence, the buyer and seller would agree to transfer the manufacturing firm on a basis of assets (for tax purposes), selling them to a German-based branch office of the automotive firm in a deal financed by buyer-issued debt for the agreed upon price.

Closing the Deal

After clearing regulatory pathways (for example anti-trust, legal incorporation, and tax payments), the firms will merge and the deal will be executed. Often, management will be kept in place, the primary purpose of the deal will to be securing a supply chain or incentivizing specific manufacturing needs of the target firm.

Example cont’d

To close out the automotive story, the German component-manufacturing firm is successfully acquired. Management is kept in place and the high-tech capabilities of the German firm work in synergy with the Chinese automotive company increasing safety ratings and cutting cost.

If you have any questions regarding M&A please contact Ecovis Beijing.

	Richard Hoffmann is a Partner at ECOVIS Beijing China. Richard obtained an honor’s degree in law and worked in Germany, America and China for various prestigious law firms prior to joining ECOVIS. He has published more than fifty articles in international magazines, frequently speaks at high profile events in China and abroad and is often invited as a legal expert by international TV. Contact: richard.hoffmann@ecovis.com
Ecovis Beijing is the trusted tax and legal advisor of several embassies and official institutions in China. It specializes in mid-sized international companies and focused on tax & legal advisory, accounting and auditing. If you’re interested in finding out more about tax and legal, don’t hesitate to sign up to our Newsletter or give us a call +86 10-65616609 (ext 811/806) or contact us directly via Beijing@ecovis.com