Acquisition Frenzy

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  • Why it matters

    Why it matters

    As German companies rush to buy companies in the United States, they need to learn from mistakes made with other acquistions, such as Reebok and Chrysler.

  • Facts

    Facts

    • German companies are once again buying up U.S. firms, but they haven’t always been successful when trying to integrate American companies.
    • There are few alternatives to the United States at the moment, with Europe still stagnating, China showing weak growth and Brazil and India even worse off.
    • Some German managers think they know the United States but they shouldn’t confuse what they learn on television with actual knowledge.
  • Audio

    Audio

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Sigma-Aldrich, Dresser-Rand, TRW, Concur are names that don’t say a lot. But they’re significant U.S. companies that German firms have either bought or about to buy for plenty of money.

And that’s only the acquistions of the last seven days. There’s no question about it: America is back on the radar of German companies seeking to establish a stronger foothold in the import U.S. market.

But they need to be careful. German companies have a history of transatlantic disasters. Deutsche Telekom is still trying to unload its U.S. mobile operator T-Mobile, which arose from the acquistion of Voicestream. The German firm paid a premium for the U.S. company in 2001.

The sports manufacturer Reebok has been a headache for Adidas ever since the German sportswear maker acquired it. Even worse was Lufthansa’s purchase of the catering giant Sky Chefs. For that deal, the sales date says it all: June 2001, just a few weeks before the terror attack in New York.

After the attack, German companies avoided the United States for many years. Now, it’s turnaround time. Hopefully, Merck, Siemens, ZF and SAP have done their homework because despite all the opportunities in the U.S. market, there are also plenty of hurdles and dangerous problems.

But what’s the alternative? Let’s pretend we’re in the shoes of a chief executive. Europe is still struggling to rebound from the euro crisis. China is gyrating all over the place. There’s no growth in Brazil and let’s not even talk about India.

So America is where the opportunities are. When compared to the rest of the world, the U.S. economy is growing.

The United States is 27 times larger than Germany. That seems like something banal, but it leads to big logistical and cultural challenges.

Take energy, for example: The American oil and gas boom is impressive and is lowering U.S. energy prices. According to conservative estimates, the boom is expected to continue for decades. That’s why Siemens bought Dresser-Rand, a company that builds compressors for energy firms.

The United States also offers a relatively cheap work force. The demographic development of the United States, unlike that of China, is positive for the next decades due to strong birth rates and immigration. The job market has improved since the financial crisis, and because many are still looking for work, that keeps wages in check.

The lower wages – a catastrophe for the American middle class – benefits companies. Boston Consulting expects U.S. companies to start returning from China, where salaries are rising. The consultancy sees a renaissance of the U.S. manufacturing sector. That, in turn, plays to the strengths of German companies, such as the auto parts manufacturer ZF, which just bought its U.S. competitor, TRW.

International acquistions, however, can be tricky and often are. The difference in mentality and work culture are bigger than many German executives realize. Just try to get a critical answer or only just the truth from a U.S. employee. Without a written contract in hand, with its required two weeks termination clause, no U.S. worker is going to hang out his or her neck.

Cost reductions and job cuts do not only have to be pushed through as soon as possible following a takeover, but clear lines of authority have to be established for the newly purchased company to gain trust and motivate workers.

Mixed teams of Germans and American should be treated cautiously. German managers often think they know the United States, but they shouldn’t confuse their TV knowledge with actual on-the-ground know-how.

The United States is 27 times larger geographically than Germany. That seems like something banal, but it leads to big logistical and cultural challenges.

Let’s take T-Mobile USA as an example.  Based in Seattle, it has essentially been like a lonely coasting satellite.

Short-term factors such as a cheap dollar or share price should not be the main driving force behind a multi-billion dollar takeover. Other important questions need to be asked: Can costs be lowered through centralized purchasing? Can new customers be gained by a better U.S. presence? Or can achievements in innovative technology be achieved?

It remains to be seen whether the German companies making the recent acquisitions have seriously looked for answers and found them. Otherwise, they could  be heading trowards a Chrysler or Reebok-like acquistion disaster.

Thomas Jahn is Handelsblatt’s New York bureau chief. To contact the author: jahn@handelsblatt.com.

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