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| Unternehmeredition M&A China/Deutschland16

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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| Unternehmeredition M&A China/Deutschland20

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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