Barbarians at the Gate: German Industry Tales
- the haptic investor
- Oct 11, 2024
- 8 min read
By The Haptic Market Lens.
Once again, a German company is the focal point of a foreign takeover. This time’s target is the Commerzbank. Once one of Germany’s flagship banks, it was kicked out of Germany’s most important stock index the Dax in 2018. Another noteworthy fact: due to the financial crisis, Commerzbank is partly state-owned. After almost exactly four and a half years and the expansion of the DAX from 30 to 40 companies, Commerzbank returned to the DAX in 2023. Therefore, one could say from an Investor’s perspective, Commerzbank is an up-and-coming shooting star, with a long track record and stable investors. So, it is no surprise, that Commerzbank is in scope of the Italian banking behemoth UniCredit. With its many distribution channels and strong digital presence, certainly a good possibility to gain foot in the German market. The potential takeover has sparked significant political tension and opposition, particularly from the German government and other German stakeholders.
Historically, foreign takeovers might have caused some headlines and lured politicians into making bold statements, but despite regulation in place, foreign takeovers in critical companies have been common in Germany. Prominent examples are Kuka, Hamburger Hafen (HHLA) and countless SMEs of the German Mittelstand, with Viessmann being the most recent one.
Noteworthy however is, that Chinese investors are particularly interested in acquiring German companies with cutting-edge technologies, especially in sectors outlined in China's "Made in China 2025" strategy. More on that later. It should therefore certainly not come as a surprise to regulators.
Shareholders often receive high valuations for their shares, and the management gets promised access to the Chinese market. Concerning for other stakeholders are potential transfers of company IP and job losses in the home region of the companies.
As Germany struggles economically, the danger of more takeovers in strategically relevant companies is rising. Germany needs to rethink its approach to foreign takeovers to protect its strategic interests and maintain control over key industries. Regulation has come into place to prohibit some takeovers, but we would like to take the opportunity to propose a more long-term solution.
The Allure of German Companies
German firms are renowned for their cutting-edge technologies, particularly in manufacturing, automation, and engineering. The country's central location and strong logistics infrastructure make it an ideal gateway to the broader European market. Additionally, Germany's diversified industry offers a wide range of sectors for investment, from traditional manufacturing to emerging technologies. These factors contribute to Germany's reputation as a prime destination for foreign direct investment (FDI).
Notable Foreign Acquisitions
Several prominent German companies have been acquired by foreign investors in recent years. Chinese appliance maker Midea acquired leading industrial robotics manufacturer Kuka AG in 2016 for €4.66 billion. Chinese state shipping company Cosco acquired a 24.9% stake in Hamburger Hafen und Logistik AG's (HHLA) container terminal in 2023. Other notable acquisitions include EEW Energy from Waste and Krauss Maffei, both purchased by Chinese investors in 2016. In April 2023, the US group Carrier Global acquired the largest part of Viessmann for 12 billion euros.
Chinese Investment Strategy
Chinese investors have shown particular interest in German companies that align with China's "Made in China 2025" strategy. This strategy aims to help China become a leading powerhouse in future technologies and reduce dependence on foreign tech. Chinese acquisitions often focus on companies in future-oriented key technologies, such as robotics, automation, and advanced manufacturing. A study by the Bertelsmann Foundation found that 64% of German companies sold to China between 2014 and 2017 belonged to sectors prioritized by China's industrial strategy. In addition, state interests, currency and companies are much more closely intertwined in China than in Western industrialized countries.
Regulatory Landscape: A Comparison of Germany, the US, and Switzerland
The regulatory frameworks for foreign takeovers in Germany, the United States, and Switzerland differ significantly in their approach and scope. The US Committee on Foreign Investment in the United States (CFIUS) plays a central role in reviewing foreign takeovers for national security risks. CFIUS has broad authority to review transactions that could result in foreign control of US businesses and can block, modify, or unwind transactions that pose national security risks.
In contrast, Switzerland's regulatory framework is more flexible, with no specific foreign investment screening mechanism. However, the government can intervene in takeovers that threaten public order or national security. Germany's approach to regulating foreign takeovers has evolved in recent years, with the Foreign Trade and Payments Act (Außenwirtschaftsgesetz) allowing for review of non-EU acquisitions. However, there are notable gaps in Germany's framework, including limited scope and less flexibility in addressing evolving national security concerns.
Need for Reform in Germany
Given the increasing complexity of global investments and emerging technologies, Germany's regulatory framework requires reform. To better protect its national interests, Germany should expand the review scope to include a broader range of sectors and technologies. Additionally, Germany should enhance proactive measures to identify potential risks before transactions occur and improve coordination between agencies.
Gates made of steel: How we defend our companies against hostile takeovers
Germany's foreign takeover concerns have sparked a heated debate about the need for a more proactive approach to protecting the country's national interests. One potential solution that has gained significant attention is the establishment of a sovereign wealth fund (SWF). An SWF would enable Germany to co-invest in strategic companies and industries, maintain partial ownership and influence, and generate long-term returns for the benefit of the country.
The benefits of an SWF are multifaceted. For one, it can help Germany maintain influence over strategic companies and industries, ensuring that key decisions are made with the country's long-term interests in mind. Additionally, an SWF can attract foreign investment by reducing political risks and providing a stable source of capital. This, in turn, can help diversify Germany's economic base and provide a cushion against economic shocks.
Moreover, an SWF can generate significant returns over the long term, providing a valuable source of revenue for the government. This can be particularly useful in addressing pressing fiscal challenges, such as funding state pensions or investing in critical infrastructure projects. By leveraging its trade surplus and other funding sources, Germany can establish a well-capitalized SWF that can deliver substantial benefits for the country.
Fortunately, the country's significant trade surplus provides a prime opportunity for an SWF. Here are some key ways a German SWF could be funded:
Trade Surplus Allocation: Germany could allocate a portion of its trade surplus to the fund each year, converting some of its export earnings into long-term investments.
Foreign Exchange Reserves: Germany could transfer a portion of its foreign exchange reserves to seed the SWF, providing an initial injection of capital to get the fund off the ground.
Budget Surpluses: In years when Germany runs a budget surplus, a percentage of the excess funds could be directed to the SWF, providing a prudent approach to fiscal management.
Privatization Proceeds: Revenue from privatizing state-owned enterprises or assets could be channeled into the SWF, converting physical assets into financial investments.
Debt Issuance: The government could issue special bonds to raise capital for the SWF, providing a dedicated funding source for the fund.
Tax Revenue: A small fraction of certain tax revenues could be earmarked for the SWF, providing a steady stream of funding over time.
Investment Returns: Once established, the fund's investment returns could be partially reinvested to grow the asset base over time, providing a self-sustaining source of funding.
By utilizing a combination of these funding sources, with a focus on allocating trade surplus earnings, Germany could establish a well-capitalized sovereign wealth fund. This would allow the country to better manage its trade imbalances, diversify its assets, and potentially generate returns to support long-term fiscal objectives.
To make the case for an SWF even more compelling, it is worth examining the experiences of other countries that have successfully established similar funds. For example, Norway's Government Pension Fund has grown into one of the world's largest SWFs, with assets totaling over $1 trillion. The fund has delivered impressive returns over the years, generating significant revenue for the Norwegian government while helping to diversify the country's economy.
Similarly, Singapore's Temasek Holdings has established itself as a leading SWF, with a portfolio of investments spanning multiple sectors and geographies. The fund has delivered strong returns over the years, providing a valuable source of revenue for the Singaporean government while helping to drive economic growth and development.
In contrast, Germany's current approach to foreign takeovers is largely reactive, relying on regulatory frameworks that are often inadequate or poorly enforced. By establishing an SWF, Germany can take a more proactive approach to protecting its national interests, ensuring that key industries and companies remain under domestic control while generating long-term returns for the benefit of the country.
To establish a successful SWF, Germany will need to address several key challenges, including identifying a sustainable source of funding, ensuring proper governance and transparency, and developing a robust regulatory framework. In addition, the composition of a balanced team of experts and managers, preferably consisting of economists and business leaders with hands-on experience rather than purely professional politicians without a track record in the private sector. However, with careful planning and execution, an SWF can become a powerful tool for promoting Germany's economic interests and securing its position as a leading industrial nation.
In conclusion, the establishment of a sovereign wealth fund is a compelling solution for Germany's foreign takeover concerns. By co-investing alongside foreign investors, generating long-term returns, and maintaining control over key industries, an SWF can help Germany protect its national interests while promoting economic growth and development. As the country navigates an increasingly complex and competitive global economy, it is imperative that policymakers consider innovative solutions like an SWF to ensure Germany's continued prosperity and success. In recent years, we have not seen much of those policymakers – but one can remain hopeful.
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