The German government has raised the bar on criteria for overseas acquirers seeking to snap up domestic targets in tech-heavy industries, and analysts believe that Germany has essentially reacted to last year’s foreign deal-making frenzy.
In case a deal is perceived to threaten public order or national security, the German government is allowed to block a non-European Union (EU) buyer from acquiring more than 25 percent of a German company under the existing law and the new directive, which was adopted on Wednesday, essentially broadens the remit of that existing law.
With special focus on companies producing software for utilities, payment, medical and transportation systems, any company that is considered to provide “critical infrastructure”, would draw special investigations into deals affecting such companies by ministers under the expanded powers now.
Driven by Chinese firms seeking to boost their technological capabilities by buying foreign targets with advanced skills in this area, there has been a spate of acquisition activity in 2016 and the tightening of regulation comes hot on the heels of that spate of acquisitions.
According to data from mergermarket for German targets, Chinese acquirers paid a total of €9.1 billion ($10.4 billion) across 35 deals last year.
Deal-making involving these countries had already slowed to a much more contained €2.4 billion in the first half of this year due to additional capital controls and restrictions imposed on would-be Chinese buyers of foreign targets by domestic authorities in recent months in combination with rising economic protectionism within Europe.
Yet, according to Yi Sun, China business services leader for Germany, Switzerland and Austria at professional services firm, EY, Chinese appetite for European and specifically German targets remains high despite the increasingly cumbersome framework.
“Tightening rules regarding takeovers for foreign investors in Germany will lead to a hold in the first place because non-European investors will have to observe the implementation of the new rules. The preparations of deals will have to be more thorough in the future but Chinese investors have become more professional in the last years,” Sun said.
“In the long run, dealmaking activity between China and Germany will remain high, keeping in mind that China is already the EU’s biggest trading partner – a reality that cannot be ignored,” she added.
The crushing of U.S. paint manufacturer PPG’s attempted purchase of smaller Dutch rival Akzo Nobel and the dismantling of the merger between the London Stock Exchange and German peer Deutsche Boerse were done after intense political debate and these are evidence that in recent months, more concerted attempts are being made to protect European companies from foreign takeovers.
According to Jonathan Klonowski, EMEA research editor at mergermarket, calls for more protection for domestic players across a range of industries have been given by several European leaders recently, and this phenomenon is not only restricted to a German governmental trend alone.
“Going forward we are likely to see firms conducting further work at the due diligence stage and we may see dealmakers becoming more selective over their prospective targets should this economic nationalism grow,” Klonowski said.
“We have already seen a drop in dealmaking from China into Europe, and the rhetoric is likely to see a further reduction in the coming months,” he predicted.
(Adapted from CNBC)