The dragon’s return

Sold! Source: DPA

At the beginning of last month, the Merck Group put one of its prize properties up for sale. The world’s oldest pharmaceutical company wants to get out of the over-the-counter medicine business, selling its Consumer Health division with 3,800 staff worldwide and annual revenues of €860 million ($1 billion).

Sources in the financial sector say there is huge Chinese interest in the sale: “Many Chinese companies are playing a waiting game right now. But even with tighter legal restrictions, strategic acquisitions make sense and will not be stopped,” said Huanping Zhang, an expert in German-Chinese deals at Eurasian Consulting.

The Merck sale could mark the beginning of a new wave of Chinese takeovers. After a difficult year for Chinese business, lawyers, consultants, bankers and executives are increasingly hopeful that Beijing will soon loosen the reins on foreign acquisitions. The key date will be October 18, when President Xi presents his new leadership team to the 19th Congress of the Communist Party. He’ll also signal the strategic direction he wants Chinese state enterprises to take.

Foreign expansion may be central to his economic vision. “In the coming 12 months, we will see billion-dollar deals between China and Europe again. Some targets will be companies listed on the stock market,” said Yi Sun, a partner at consultant EY. Companies in the crosshairs include banks, insurance companies, robotics and pharmaceutical firms, but also retirement and care homes, she said.

17 p28 Investments in China-01

Until mid-2016, Chinese executives had considerable freedom to attempt foreign takeovers. The result was a European buying spree, with Chinese companies snapping up firms in industry, entertainment and property. The biggest deal of all was Chemchina’s $42 billion offer for Syngenta. Looking to boost agricultural output, China primarily wanted the Swiss pesticides and seed firm for its expertise. But the Beijing-based chemical giant Chemchina also made other deals, swallowing the Italian tire manufacturer Pirelli a year earlier and, in 2016, Germany’s KraussMaffei, a machine tool maker.

Selling European companies to Chinese peers wasn’t always so easy. In 2016, Chinese household goods maker Midea moved to acquire Kuka, a maker of industrial robots that employs more than 12,000 worldwide. Berlin was alarmed at the prospect of a cutting-edge German automation firm passing into Chinese hands. No European buyer could be found and ultimately the sale was approved. But the subsequent debate resulted in tighter regulations on the sale of high-tech companies to foreign buyers. “Right now, it’s hard to tell just how strictly they will be applied,” said Matthias Horbach, a takeover specialist with New York law firm Skadden, Arps, Slate, Meagher & Flom.

The wave of acquisitions didn’t just draw political attention, it also caused serious currency imbalances in China. The government stepped in and since November 2016, acquisitions must strengthen a company’s core business. Chinese investment fell sharply: between January and September of this year, Chinese acquisitions in the European Union totaled $24.4 billion, down 11 percent on 2016, according to figures from Thomson Reuters.

Nonetheless, investment bankers, lawyers and consultants with close Chinese ties are convinced that a new acquisition wave is rapidly building. Beijing’s industrial master plan aims to modernize key sectors of Chinese industry by 2025. But bringing industry to a world-class standard will need Western expertise. “Capital market controls in China are leading to fewer deals. Nonetheless, there is Chinese money in many current bidding processes. Bidders from China are less wild now, more mature and experienced,” said Oliver Lütkens, co-head of German takeovers at Deutsche Bank.

“For China, the European – and above all German – markets remain highly attractive.”

Z. Julie Gao, a Hong Kong based takeover lawyer

Merck’s non-prescription drugs business could be used by Chinese suitors as a platform for further acquisitions. “The Chinese think they have the most ground to catch up in the pharma business,” said one insider. But there is bitter competition for top-quality acquisitions, and bidding wars are often the result.

This shouldn’t be a problem: China’s stock market is in good health, fueled by the country’s historically high saving rate. For Chinese buyers, paying a premium to enter the European market is well worth it. “Chinese investors will pay somewhat higher prices for acquisitions,” said Mr. Zhang of Eurasian Consulting.

But it’s not just drug companies and bidding wars. Chinese bidders may still be circling German lighting manufacturer Osram: political pressure quashed a bid last year. Earlier this month there was a surprisingly low uptake when Siemens sold off its remaining stake in Osram, making it even more attractive to Chinese companies such as semi-conductor maker San’an Optoelectronics.

Other strategic moves can be observed around the globe. In July, a Chinese consortium bought the Singapore container terminal Global Logistic Properties for $11.6 billion. Beijing-based auto parts maker WKW is to build a $1 billion electric car factory in the German state of Saxony.

And the dragon seems ready for even bigger, even bolder leaps. Europe can expect many more bids in the coming months. “For China, the European – and above all German – markets remain highly attractive,” said Z. Julie Gao, a Hong Kong based takeover lawyer.

Peter Köhler is a Handelsblatt editor in Frankfurt, reporting on banks, private equity firms, venture capital and corporate funding. Robert Landgraf is Handelsblatt’s chief correspondent for the financial markets. To contact the authors:,

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