August$%&'( !#$% Euro M&A$ChinaJ Deutschland$ · Vertrag ist nicht gleich Vertrag Kulturelle...
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Sino-German M&A Sentiment
Despite increasing M&A volumes over the last years, there are still some severe chal-
lenges German and Chinese companies have to face when entering the foreign market.
In the following panel discussion leading experts debate the most critical hurdles in
Sino-German M&A deals.
Unternehmeredition: What are the major
problems concerning M&A deals
between China and Germany?
Susan Lam, Director Germany & Central
Europe, Hong Kong Trade Development
Council (HKTDC): The lacklustre Euro-
pean economy may be of concern to
Chinese investors seeking advanced
technologies from Germany and to en-
hance their brand awareness across
Europe through Chinese-German mer-
ger and acquisition (M&A) deals. But
the tight credit conditions in Europe
and the competition for the outward
direct investment (ODI) from the Chi-
nese mainland will continue to increa-
se. This development will make it less
profitable for German companies to
forge M&As.
Daniel Mahnert-Lueg, Managing Director
China, Westlake Partners: German com-
panies too often fall in love with the
first consultant with China contacts
they meet without really knowing who
that is. And they underestimate the
cultural differences. Small companies
have to be optimistic because they do
not have the resources for a systema-
tical approach. Once the company has
successfully entered the market, it has
to review its plans in order to have a
systematic approach.
Dr. Thomas C. Sittel, Director, goetzpart-
ners CORPORATE FINANCE GmbH: The
primer challenge Chinese parties en-
counter in outbound transactions is
Einführung
well reflected in a popular Chinese
proverb: “Think three times before
you move.” In many cases Chinese
buyers are still reluctant to engage in
condensed timelines and auction pro-
cesses. An exemplary statement from
a meeting with a potential buyer in
Beijing: “Only 7-8 months until signing?!
This is nothing we can deal with!” Fur-
thermore, outbound M&A processes
require approval from various Chi-
nese authorities (e.g. SASAC, NDRC,
MOFCOM, SAFE, CSRC) which fre-
quently makes Chinese buyers slower
and less predictable. Inexperienced
sellers are often surprised, when all
but one Chinese party retreats from
the process simultaneously. Even with
strong connections to the authorities,
it is very hard predict, who will be the
“chosen one”.
Eng Choon, Managing Director, ZJ (Shang-
hai) Advisory Co., Ltd.: Due to the dif-
ferences in cultural and business
practices, it is very common for a
private enterprise in China to keep
at least two sets of books, i.e. one for
the local tax authority and the other
for management reporting purposes.
In addition, there are differences in
accounting standards as most Chi-
nese companies’ (especially the pri-
vate enterprises) accounting practice
is very much influenced by the local
tax regulations/practice, which is
on cash basis, compared to the ac-
crual basis adopted by International
Accounting Standards (IFRS). The
“cash” accounting may distort the
evaluation of the performance/valua-
tion in M&A deals.
German compa-
nies too often fall
in love with the
first consultant
with China con-
tacts they meet
without really
knowing who
that is.
DANIEL MAHNERT-LUEG Managing Director China, Westlake Partners
Einführung
What are the major challenges for
German companies entering the
Chinese market?
Choon: Frequent changes and updates
in PRC laws and regulations especially
after China’s accession into WTO has
put tremendous pressure on enterpri-
ses (foreign and local) to cope with the
changes. The situation is aggravated by
different interpretation and implemen-
tation of national laws and regulations
in different cities and even within the
same government offi ce of a city, the
interpretation and implementation of
laws could vary. Furthermore, there is
diffi culty for enterprise to recruit and
retain qualifi ed management person-
nel with good management skill and
reasonably good command of English
(not to mention other languages such
as German and French).
Mahnert-Lueg: The German “Mittel-
stand” needs to globalize because
there usually facing globalized compa-
nies. But they have trouble doing that
because of their capital and manage-
ment capacity. If German companies
do not go out to foreign markets like
China, other companies will come in
and enter the German market. Many
German companies have failed enter ing
the Chinese market because they do not
take a systematic approach on globali-
zation. German companies often overe-
stimate who they are. There is a certain
level of arrogance. They are number
one in Germany, but in ¡China, they are
a small fi sh in a huge pond. They think
that the Chinese have to love their pro-
ducts because they are superior. But
maybe the Chinese market is not ready
for those superior products. So they
have to downgrade a bit. Adapting to
the local environment is very diffi cult.
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Einführung
Lam: Besides from the search for good
buys, partners and M&A service pro-
viders – language and cultural diffe-
rences may cause misunderstandings
in negotiations. In addition, a lack of
transparency in procedures for docu-
mentation, taxation, approvals from
local/national government authorities
– depending on the size and scope of
the prospective deals – can contribute
to the challenges for German compa-
nies entering the Chinese market.
Sittel: Inbound transactions volume is
still relatively low. In 2012, these tran-
sactions represented less than one
third of all Sino-German deals. Most
transactions are – for different reasons
– still carried out as Joint Ventures.
One good example is the recent Joint
Venture between GETRAG and Dong-
feng Motor Group. The two common-
ly known challenges faced during in-
bound M&A processes are protection
of Intellectual Property and overco-
ming language as well as cultural diffe-
rences. Additionally, a German partner
will have to accept that the selection of
the potential partner/target is strongly
influenced by the government. The-
re is a tight pre-selection done by the
NDRC. Following an acquisition or a
joint venture the operational manage-
ment of the company in China repre-
sents the main challenge. In the case
of a joint venture, a Corporate Gover-
nance arrangement needs to guarantee
the desired level of influence for the
German acquirer. Furthermore, the
retention and guidance of an often
highly “flexible” blue-collar workforce,
is a major challenge.
What are the major challenges for
Chinese companies entering the
German market?
Mahnert-Lueg: We often meet Chinese
companies who really want to invest
in Germany but simply do not know
how to do it. Many M&A brokers have
trouble with Chinese investors. Ger-
man Mittelstand companies who are
looking for investors usually do not
want private equity companies. They
have heard that the Chinese strategic
investors typically pay more money.
Sittel: Based on our transaction and
consulting experience with Chinese
investors, we have identified four main
challenges pre- and post-acquisition:
(i) The identification of suitable tar-
gets is often demanding from far away.
In many cases, the required analysis
of the competitive environment and
ongoing transactions is not sufficiently
executed. (ii) Excellent contacts to
management and shareholders are
keys for the establishment of a direct
contact between parties. Most foreign
investors do not have the required
network. (iii) Aside from performing
a comprehensive due diligence on the
target, political and public awareness
has to be thoughtfully managed by
the Chinese investor. (iv) The Post-
Merger-Integration can be challenging
as it is difficult to operatively manage
the company from far away. Raising
synergies, accessing new markets as
well as sourcing opportunities need be
secured.
Lam: Challenges often arise when pro-
spective M&A deals involve sensitive
businesses such as energy, specialist
technology, patents, media and net-
work security. Different standards
regarding environmental protection,
corporate governance and disclosure
requirements can create challenges
for Chinese companies entering the
German market. In addition, Chinese
enterprises face various difficulties
due to a dearth of sophisticated sup-
port services on the mainland to cover
sectors such as accounting, finance
and law.
Challenges of-
ten arise when
prospective M&A
deals involve
sensitive busi-
nesses such as
energy, specialist
technology, pat-
ents, media and
network security.
SUSAN LAMDirector Germany & Central Europe, Hong Kong Trade Development Council (HKTDC)
Einführung
Choon: Some of the major challenges
faced are revolving around diffe-
rent management cultures post ac-
quisition as a lot of German targets
are family-owned and the acquirer
needs to take time to learn about
the business environment including
the management style of the target.
Meanwhile, cross-border technolo-
gical transfer remains sensitive and
a subject that does not necessari-
ly occur as planned if the Chinese
companies simply wish to imitate
the target and there is risk that the
technology know-how of the target is
We often meet Chinese companies who
really want to invest in Germany but
simply do not know how to do it.
DANIEL MAHNERT-LUEG Managing Director China, Westlake Partners
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Einführung
not able to be fully integrated into the
acquirer’s own operations.
What does the slowdown in China’s
GDP growth mean for Chinese com-
panies in M&A deals – acquirers as
well as targets?
Sittel: In recent weeks, the sentiment on
China has been hit hard by concerns
about the unwinding of the U.S. mo-
netary stimulus as well as signs that
China‘s economy is slowing down faster
than anticipated. Some market analysts
are even foreseeing a secular end of the
“China Story”. However, despite a dor-
mant global M&A market, acquisitions
of German targets by Chinese buyers
have increased more than tenfold since
2010. This trend is unbroken and the cur-
rent economic slowdown in China will
not alter the global acquisition agenda
of the Chinese government as defined
in the current five-year plan. Generally,
on a corporate level, M&A decisions are
also influenced by temporary factors
such as market sentiment, financial per-
formance and financing availability. In
Chinese companies though, these fac-
tors are strongly “overlaid” by the cen-
trally-planned economy. Unless China
drops into an unlikely deep recession,
we expect no significant consequence
on the M&A activity.
Choon: Despite the softening of the Chi-
nese economic growth, Chinese com-
panies are still keen to acquire Euro-
pean targets with good technological
assets and reputable brand in order to
overcome current technology know-
how bottleneck. However, some of the
potential acquirers may adopt a wait-
and-see approach before undertaking
“big-ticket” transactions. Though the
slowdown in GDP growth had impact-
ed most sectors of the Chinese econo-
my, but we believe that there are still
good opportunities of growth via M&A
deals, which could improve competi-
tiveness and establish better market
footprints of the acquirers while the
targets could leverage on a more so-
lid platform for technology and know-
ledge transfer.
Lam: The number of the Chinese main-
land outbound deals fell in line with
global economic uncertainties to 191
in 2012 from 206 in 2011. Deal values,
however, registered 54% year-on-year
growth to reach a record high of 65.2
billion USD. Many more deals are fore-
cast in the pipeline and a strong growth
trend is likely to continue leading up to
another record year in 2013. It is, how-
ever, interesting to note that the main-
land M&As are likely to remain focused
However, despite
a dormant global
M&A market, ac-
quisitions of Ger-
man targets by
Chinese buyers
have increased
more than ten-
fold since 2010.
DR. THOMAS C. SITTEL Director, goetzpartners CORPORATE FINANCE GmbH
Despite the sof-
tening of the Chi-
nese economic
growth, Chinese
companies are still
keen to acquire
European targets
with good techno-
logical assets and
reputable brand in
order to overcome
current technol-
ogy know-how
bottleneck.
ENG CHOON Managing Director, ZJ (Shang-hai) Advisory Co., Ltd.
Einführung
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in line with sectors identifi ed as criti-
cal to future growth by China’s new
leadership. Examples of these sectors
are those singled out in China’s 12th
“fi ve-year plan”. And for M&A targets
on the mainland related to industrial
upgrades and modernization, China
is likely to continue to welcome Ger-
man investors as they are seen to have
world-class operational, managerial
and innovation expertise. Given the
mainland’s continued efforts to foster
consumption – retail and distribution
businesses are expected to be among
the potential targets for acquisition.
Mahnert-Lueg: The people are aware
of what is happening in China. The
economy is slowing down, but it does
not have a huge impact on the daily li-
ving. The Chinese are used to the Yin
and Yang effect. They are neither opti-
mists nor pessimists. That means that
from their point of view everything
has good and bad aspects at the same
time. The slowdown is actually good
for the Chinese economy, because the
growth we saw over the last years was
unhealthy. Cities were built up within
a few years, just because local govern-
ments wanted to fulfi ll the GDP target.
That does not add to the productivity
and the quality of living. The slowdown
gives China some kind of a reality
check. A really big issue is that many
companies have lived by growing. It
was a messy growth. Their margins
are relatively low, because they have
not optimized their structure. If those
companies stop growing, they have a
lot of excess capacity. They are quite
over-leveraged. A bad scenario can
happen that many private enterprises
need to shut down, because they were
always competing on prize with very
little margins.
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