Germany Embraces China Buyers Once Spurned as Economy Stings

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Germany Embraces Chinese Buyouts Once Spurned as Economy Stings
A Sany Heavy Industry Co. 86m truck mounted concrete pump is introduced at the company's factory in Changsha, Hunan Province, China. The biggest Chinese takeover came in January when Putzmeister Holding AG, Germany’s largest cement-pump maker, agreed to be bought by Sany Heavy Industry Co. for about 525 million euros ($656 million) including debt. Photographer: Forbes Conrad/Bloomberg

Germany’s mid-size businesses, considered the backbone of the country’s economy, for years spurned advances from Chinese companies. Then the global economy slumped and German companies stopped playing hard to get.

So far this year nine German “Mittelstand” companies, typically family-owned with fewer than 500 employees, have agreed to be acquired by Chinese firms, bringing the total to 21 since the beginning of 2011. China surpassed the U.S. last year to become the largest foreign direct investor in Germany by number of deals. The uptick signals that the 3 million Mittelstand companies, accounting for roughly half of Germany’s economic output, will put aside their wariness of China and outside ownership in favor of growth and survival.

“Many Mittelstand companies ran into problems during the financial crisis,” said Christian von Stetten, a German lawmaker in Berlin who helps oversee a Parliamentary committee on Mittelstand firms. “A Chinese investment can make sense and be a way out of the crisis.”

The biggest Chinese takeover came in January when Putzmeister Holding AG, Germany’s largest cement-pump maker, agreed to be bought by Sany Heavy Industry Co. for about 525 million euros ($656 million) including debt. In 2009 its sales had plunged by half to about $547 million, prompting a restructuring and a search for an investor, said Putzmeister Chief Executive Officer Norbert Scheuch, 52.

“Sany was love at first sight,” Scheuch said.

German Concern

Such sentiment was scarcely heard before. German owners said they feared that Chinese buyers would dismantle their companies and cut or move jobs back home. That would undermine a segment of Germany’s economy that employs 70 percent of its 42 million workers and yields technological know-how in specialized niches, like machine building, solar power and automotive supply.

“There were concerns that, like American companies and some venture capitalists, the Chinese will suck a company dry, take the filet pieces out and then dissolve it,” said Marc Tenbieg, managing director of the DMB Deutscher Mittelstands-Bund, which represents more than 14,000 small and mid-sized enterprises.

The sovereign debt crisis and Europe’s recession softened that kind of nationalistic thinking.

“We’re convinced the Chinese-German M&A story is gaining traction because there’s been a sizable learning curve for both sides,” said Kai Tschoeke, head of deals at Morgan Stanley in Frankfurt, which advised Putzmeister, in an interview.

National Pride

Chinese executives are easing German resistance with promises of job security and appeals to its national pride.

Sany plans to make Aichtal, the southwestern German town where Putzmeister is based, its global headquarters for concrete machinery outside of China. Sany also agreed to keep open all German production sites until 2015 and to avoid layoffs through 2020, short of the economy tanking. It will use the German brand in all countries excluding China, leveraging the “Made in Germany” label. Its goal is to boost Putzmeister annual sales to 2 billion euros by 2016 from 570 million euros in 2011.

These assurances have seemed to satisfy the 3,000 employees at Putzmeister, which has built a reputation providing cement pumping machines used to build the world’s tallest building in Dubai and help quell the nuclear disaster in Fukushima, Japan.

“We prefer the Chinese because they have a long-term strategy, whereas Anglo-Saxon private equity firms are all about a quick turnaround,” said Sieghard Bender, a union leader who had organized protests against the takeover. “Sany will do everything to make the Putzmeister deal a success.”

Distressed Companies

Private equity firms in Germany are still trying to shake the “locusts” label, coined by former German Labor Minister Franz Muentefering, for their focus on cutting jobs and leveraging debt for short-term gains.

Chinese purchasers have focused on distressed companies. In January, LDK Solar Co., China’s second-largest solar panel maker, agreed to buy Germany’s Sunways AG as domestic panel makers struggle to cope with competition from Asia.

Less than three months after the Sany transaction, China’s XCMG Construction Machinery Co. agreed to buy Putzmeister’s main domestic competitor Schwing GmbH. In March, Hebei Lingyun Industrial Group Corporation Ltd. agreed to purchase Kiekert AG, the world’s largest supplier of car latches that had been taken over by its creditors.

German distrust over Chinese takeovers has its basis. SGSB Group Co., a Shanghai-based maker of sewing machines, completed the purchase of a majority stake in Germany’s Duerkopp Adler AG in 2005. After the takeover, the company “vastly failed” to meet its own sales expectations, the then Chief Executive Officer Werner Heer said in that year’s annual report. The company has cut a third of workers since the takeover.

Bilateral Investments

There are still “some misperceptions and skepticism” to the Chinese in the German Mittelstand, said Michael Reinert, a senior managing director at FTI Consulting. “They are very aware of public perception and more and more looking for friendly, strategic transactions with a long-term perspective.”

Both German Chancellor Angela Merkel and Chinese Premier Wen Jiabao have promoted bilateral investments. Wen has visited Germany six times since taking the helm in 2003 to advocate investments in both countries.

“The approval process of the Chinese authorities for investments in foreign companies has been eased,” Yi Sun, a partner at Ernst & Young, said today at a press conference in Frankfurt on Chinese investment. “The government wants to promote foreign purchases in order to reach its goal set in the last five-year plan to orientate the Chinese economy towards more qualitative growth.”

The test for the Putzmeister and other takeovers will come if new owners start making management changes, closing factories or firing workers, said Tenbieg, the Mittelstand representative.

“At the moment everything looks rosy,” he said. “Now we have to see whether promises are kept.”

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