Selling your company to Chinese investors

By Richard Hoffmann, ECOVIS Beijing

In this article we have a look at the motives of Chinese investors for investing in Germany and how German companies can benefit from the relationship with their new Chinese owners.

Motives of Chinese investors for investing in Germany

Chinese spending on German firms increased dramatically between 2008 and 2011. Targets of Chinese companies are small and medium sized enterprises (SMEs) which typically specialize in niche markets – many of these companies are market leaders in engineering and technology markets. We mentioned, for instance, Putzmeister in one article, a producer of cement-pumps in southern Germany that was purchased two years ago by China’s Sany Group.

There are many reasons for Chinese companies to acquire such firms. Besides overall synergies and long-term access to the local market, M&A activities allow Chinese companies to acquire business and technical know-how along with patents. As a long-term perspective Chinese companies also open up the opportunity of introducing a low-end Chinese brand to the international markets. German companies have become synonymous with high-quality products and Germany’s strong performance in a weak European market has made its small and medium sized enterprises even more attractive to Chinese buyers. There are no signs that the number of M&A deals are declining.

Worries about uneven business relationships, in which Berlin gives away and Beijing gains disproportionately widely exist throughout Germany. However, Chinese takeovers should not be seen as disadvantageous: Through a merger or an acquisition, German companies can enter China’s rapidly growing market and take advantage of its high potential. The companies create a more competitive, cost-efficient entity and are able to gain a greater market share.

Benefits of German M&A deals in the Chinese market

The priorities of Chinese companies when acquiring German companies have not always been those of today. Beginning at the turn of the century, it was mostly important for the companies acquired to be cheap and easy to buy. Due to the fact that many early investments were made in companies on the brink of bankruptcy, the failure rate of the deals was high. Most of the Chinese managers assigned to organize the transition were inexperience with conducting due diligence and with managing across international borders – the integration after the acquisition did not follow as planned. The Chinese party would often ruthlessly overrule the acquired company and when financial difficulties began to arise, the direct transfer of assets to China was often the last option to minimize losses.

On the contrary to this historic pattern, M&A deals which resulted in failures have decreased in recent years. Chinese companies often leave local management in its prior position and prefer to take the long-term strategic approach to become active in the local foreign market. In general, Chinese managers now often keep the existing business models as they stand and only integrate certain functions (e.g. HR and other internal affairs). Putzmeister, for instance, was still to be run by its incumbent managers and Norbert Scheuch, CEO of Putzmeister, was even nominated to the board of directors at Sany – later in 2013, Gerald Karch took over his position and joined the board of directors of Sany as well. Furthermore, all employees at Putzmeister were kept in the company and not dismissed: high-quality manufacturing by Putzmeister has thereby been maintained and the brand perception of Sany Group has been enhanced.

With contributions by Markus Mönch (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
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