Germany Drops the Ball

A counteroffer for German robot-maker Kuka looks unlikely.

Talk to a German businessman or politician about the country's economic prospects these days and they're almost certain to mention the importance of "industry 4.0" -- a catch-all term for using internet-connected technology in manufacturing. 

Given Germany's engineering prowess, the industrial internet represents a huge opportunity for the country; but there's the always risk that others, perhaps from China or Silicon Valley, beat Germany to the prize.   

It's hugely politically awkward therefore that Kuka, a German maker of robots used in factories, is poised to be acquired by China's Midea in a deal valuing the company at about 4.5 billion euros ($5 billion).

Up and Away

A counterbid for Kuka looks unlikely given how expensive the shares have become

Source: Bloomberg

Guenther Oettinger, Germany's top representative at the European Commission, said on Monday that he hoped an alternative offer for Kuka would emerge from somewhere in Europe.

But Kuka's investors shouldn't hold their breath -- this ship looks like it has already sailed.

Oettinger is right to be alarmed about the naivety Germany has demonstrated over the fate one of the country's industrial champions.

Not only are robots destined to take over many jobs, making it a key future industry, Kuka's robots are also widely deployed in Germany's car factories producing the country's most important export.

Germany's business and political elite should have realized what might be afoot when Midea first acquired a stake in Kuka in August.

But now it's arguably too late. Midea's offer is equivalent to about 17.5 times Kuka's trailing Ebitda and represents a 60 percent premium to stock price in February, before speculation of a bid emerged.

What European buyer has pockets deep enough to rival that? Siemens, perhaps?

Stagnant Siemens

The German industrial giant's shares are up less than 2% over the past year

Source: Bloomberg

To be sure, under CEO Joe Kaeser Siemens has made the digital factory a key plank of the company's strategy.

And unlike Swiss rival ABB, Siemens doesn’t have robots in its industrial portfolio. Curiously, Siemens' chief strategy officer Horst Kayser previously worked as Kuka's CEO.

But Kaeser is still smarting from investor criticism of the 28-times trailing operating profit he paid for oilfield equipment maker Dresser-Rand -- a $7.6 billion deal announced shortly before oil prices collapsed. 

A deal might once have made sense, but he can't now risk overpaying for Kuka, whose shares have gained more than 900 percent over the past six years.

Nor is it likely that Voith, a closely-held engineering group which has a 25 percent stake in Kuka, will find the cash to mount a rival offer. 

Voith's roots are in paper-making machines, but the growth of digital media has disrupted that industry, forcing the German company to restructure. Moody's downgraded Voith in September, citing a "weakening capital structure and cash flow generation".

If acquiring the anchor stake in 2014 was intended to prevent a takeover of Kuka, Voith has manifestly failed. Now it has every incentive to sell and at least realize a return on its investment. 

Might Germany's carmakers band together to buy a key supplier in the same way they joined forces to acquire Nokia's digital mapping business

Doubtful. Right now, Volkswagen has got more pressing priorities for its cash -- such as paying diesel-related fines. In any case, annoying China isn't advisable if you have want to sell lots of cars in that country.

Indeed, given the importance of Germany's exports to China, Berlin will surely be reluctant to block the takeover on national security grounds.

Oettinger told Bloomberg News that "we should do a better job in looking after the key future contributors to Europe's industry." 

Touché. Next time German politicians tell you that they are focused on enabling the country's future in the industrial internet, you'll be forgiven for taking the claim with a pinch of salt.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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