According to INSEAD Affiliate Professor of Accounting and Control and Business Law, Jake Cohen, and Jörg Nürnberg, a partner with consultants Dröge & Comp., this M&A activity has opened up a window of opportunity for Asian investors to buy up distressed companies and become part of ‘Germany Inc’, the close-knit network of German companies and banks.
“Basically, it’s the continuous break-up of ‘Germany Inc’ or ‘Deutschland AG’, where in the past a lot of companies have been closely entangled with each other. Banks owned large portions of publicly-owned companies and also heavily invested in small- and medium-sized firms, which didn’t give any opportunities to outside investors,” Nürnberg says. “Now this is breaking up, also due to tax laws which have been changed, giving companies opportunities to sell off their shares and this is one of the reasons why outside investors are now more welcome and able to invest in Germany.”
Cohen says this all adds up to present Asian investors with good buying opportunities. “The German market … has not been managed maybe as well as it could in terms of the balance sheet. The balance sheet is a lot of money that’s mostly bank financing rather than equity financing. As we are moving towards a higher level of liquidity around the world, that level of liquidity looking for best returns, the returns could be created by finding markets which have not been broken into or that heavily invested in and Germany fits the bill.”
“Germany has been a country that was mostly financed with bank financing and if there’s equity looking for higher returns, they’re not necessarily going to find those higher returns in the US where there are many dollars chasing the same deals. Rather they could find those higher returns in a market which is still relatively unexplored,” Cohen says.
Potential M&A targets
Companies likely to be targets would be firms which “have not been managed well or have a high cost structure,” Cohen adds. This sometimes results in private equity firms coming in. For example, the family behind Rodenstock, Germany’s largest manufacturer of eyeglasses, which had been unable to raise additional capital to fend off insolvency, sold a majority stake in the company to UK-based private equity firm Permira.
Struggling German companies are also targets for Asian firms which are riding economic growth and are looking beyond the region for investment opportunities. China’s Harbin Measuring and Cutting Tool Group (The Harbin Group) found a logical partner in Kelch, which makes precision tools, allowing it to acquire technological know-how and gain access to trade contacts in Europe and the USA. Another Chinese company, Shenyang Machine Tool Group, took over insolvent German firm Schiess, which had been making heavy lathes and boring machines for 140 years. Again, the Chinese firm gained expertise, including access to patents. From the German company’s perspective, Schiess was able to hire more workers instead of shutting down its operations and laying off all its employees.
High cost structures in Germany are likely to deter some investors though and interest from private equity firms also means that investors might have to pay higher prices for assets. “I definitely think that prices have gone up and it’s true they’re not cheap as before,” Cohen says, “But that does not necessarily mean that the opportunity has passed you by and you can’t find other companies in that market which still provide a nice risk-return profile.”
“So the fact that prices have gone up is not a question and that’s driven by financial and strategic buyers looking for deals around the world, but that doesn’t prevent you from finding other such opportunities which I believe exist.”
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