ChemChina acquires German company

$1 billion deal for KraussMaffei would rank as biggest outbound Chinese investment in Germany, called consistent with upgrading trend

The acquisition of Germany's KraussMaffei by a consortium headed by China National Chemical Corp for 925 million euros ($1 billion) is being hailed by analysts as a significant deal, and part of a growing trend of Chinese industrial upgrading through overseas acquisitions.

KraussMaffei is a maker of equipment that processes plastics and rubber.

China National Chemical Corp., known as ChemChina, announced on Jan 11 that the consortium would acquire KraussMaffei from Canadian private-equity firm Onex Corp, although the transaction is still subject to regulatory approval. If successful, the deal would rank as the biggest outbound investment from China in Germany, according to data provider Dealogic.

The consortium led by ChemChina also includes private-equity firm AGIC Capital and Chinese state fund Guoxin International Investment Corp.

Howard Yu, a professor of strategic management and innovation at IMD Business School in Switzerland, says the acquisition rides on the back of an emerging recent history of Chinese industrial firms acquiring advanced German technology firms, in their quest for more distinct capabilities and to establish an international presence.

Yu says many German technology-driven firms that require additional equity are often midsize companies that are technologically advanced but limited in size. "Thus the linkup between China's scale and Germany's technology is more than incidental. It's the marriage of two distinct best-in-classes."

The KraussMaffei deal fits into China's strategy of achieving a structural shift from a pure manufacturing focus to a high value added knowledge economy.

Last year ChemChina also bought a majority stake in Pirelli, the world's fifth-largest tire-maker, in a 7.1 billion euro deal. In 2012, Chinese construction-equipment company Sany Heavy Industry Co. bought Putzmeister Holding, a maker of high-tech concrete pumps.

Yu says Putzmeister is a good example of mid-cap German companies traditionally able to stay financially viable through technology leadership, but increasingly unable to face strong international competition in recent years amid an adverse economic environment.

Yu expects more industrial mergers and acquisitions similar to the KraussMaffei and Putzmeister deals.

Unlike the previous wave of US-dominated acquisitions in Europe that mainly sought to increase market share, Chinese acquisitions tend to be focused on learning technological know-how, he says.

Yu's analysis appears to be consistent with statements from ChemChina and KraussMaffei.

Frank Stieler, CEO of KraussMaffei, says that ChemChina is a "strategic and long-term oriented investor". Ren Jianxin, chairman of ChemChina, says that his group is investing in KraussMaffei's strong management team and technological expertise, which will help to benefit ChemChina's position in the chemical machinery business.

Ren adds that he expects the growth in advanced manufacturing and lightweight components in China's automotive industry will continue, providing huge development opportunities for the plastic injection molding industry, and ChemChina and KraussMaffei are well-positioned to take advantage of this trend.

Michael Winderoth, associate professor of marketing at Spain's IE Business School, adds that Chinese firms are increasingly emerging onto the international mergers and acquisitions stage because they are ambitious and see attractive buying opportunities, and are willing to invest.

"They have the capital, know the window of opportunity may not be forever, and are willing to take risks. The valuations may feel high, but it makes perfect sense when you understand the context the companies are in," Winderoth says.

He adds that ChemChina's stated commitment to leave KraussMaffei's management, employees and EU headquarters and operations in place is a smart move.

In the post-merger process, there could be challenges to smooth cross-border, cross-cultural mergers, given that in many ways the German and Chinese cultures are quite different, he says.

"Given their acquisition spree, they have probably been learning a lot about how to maximize the synergies, but I think a key element is leaving the current team in place and not rushing. They can also learn a lot from Lenovo, which shines as one of the early Chinese acquisitions that turned out well. Part of their success was leaving a lot of local autonomy," he says.

Lenovo, which acquired IBM's personal computing division in 2005, is now commonly cited as one of the most successful overseas acquisition cases by a Chinese firm, as it enabled the Chinese firm to rapidly expand its products and expertise across Western and emerging markets.

Danae Kyriakopoulou, a senior economist at the UK's Centre for Economics and Business Research, adds that the deal has other significance, which is to show that despite troubles at home, China's companies still have large piles of cash that are looking for returns. "These are most likely found in European firms that are struggling to otherwise access capital for investment in today's economic situation in Europe," Kyriakopoulou says.

cecily.liu@chinadailyuk.com.cn

(China Daily Africa Weekly 01/22/2016 page29)