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Michael Wiehl

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More and more companies from Asia, mainly China, are flocking to Germany. What are the aspects German enterprises should pay special attention to when Chinese investors come to buy their business?

Earlier, German enterprises feared that if Asian investors acquired German companies they did it only to vacuum off the know-how, shut up shop and move production overseas.

This fear is however often unfounded. According to the experience of Michael Wiehl, Attorney at Law and Partner, Leader of the International Transaction Practice at Rödl & Partner in Nuremberg, more and more Chinese companies are currently buying into German companies to set up or expand production in Germany and apply the existing know-how also to their local markets.

Manager Magazin reported in December 2013 that China buys in this way "technology and local market leaders, the so-called hidden champions, to cut down the excruciatingly long time and the extremely high costs needed for expanding own brands".

Such local and known champions can be found in Germany mainly in the segment of machine construction, automotive supply industry or medical technology. The sizes of target businesses range from small special-purpose machinery construction companies boasting annual revenue of EUR 15 million to large automotive suppliers generating several hundred million euros in revenue.

Irrespective of the size, investors seek many things in a business: a good team, a good product, global industrial property rights safeguarding international sales, and a well-positioned company. "It is the unity between production and know-how of employees that the Chinese investors are after", says M&A expert Michael Wiehl. According to his observations, they are attracted to the synergy between organisation, personnel, and high-quality procedural know-how.

It is a combination that cannot be transplanted overseas just like that. However, with taking over a strong German manufacturer, the Chinese market can be supplied until production facilities set up based on the German model reach the global market level.

Currently, the largest part of Chinese buyers are still state-owned enterprises that are not interested in lucrative exits but in continuing operations and expanding their business. Chinese investors that typically use services of private equity firms to buy into companies or acquire companies only to exit after several years and cash in the profit are rarely among those interested in buying German companies. Nevertheless, one should expect that this might change in the future.

The fact that buyers are usually state-owned enterprises leads to a situation where sellers don't have to worry about their credit worthiness. The purchase funds are in place and costly borrowings or other financing structures do not play an important role yet (as of now).

The fact that enough capital is in place does not yet mean that buyers from China will spend lavish sums. Quite the opposite. "When there's money, there's close scrutiny", says Wiehl drawing on his experience. This applies not only to prices and adviser fees, but also acquisition negotiations are shaped by Chinese buyers' great need for controls and a fear of being outsmarted.

In addition, in cross-border deals, Chinese investors should remember that in China alone those deals must undergo an approval & registration procedure by local authorities before the purchase price can be offered abroad at all.

Thus, buyers closely watch German advisers reviewing the prices instead of letting them simply do their job. Buyers engage translators to extensively translate contracts and documents drafted in German and introduce own suggestions to those contracts. The aim: to have supposedly even better protection as an investor. So far, they haven't quite understood why their wish to talk to employees of the target company earlier has been refused for confidentiality reasons.

For such regulatory hindrances and partially culturally driven differences not to turn out to be deal breakers, good advisory services are required. "Here, you need to know how to walk on eggshells to show to the buyers that their rights are safeguarded even if not everything can be arranged according to their expectations", says Wiehl. Sellers, on the other hand, should check whether their strategic corporate goals are in line with those of the buyers. Only if expectations on both parts meet will the transaction prove successful for both parties.