The consensus in the German Bundestag on the amendment of the Foreign Trade Act was remarkable. A draft bill by the federal government that receives the approval of the Left Party and conservative CSU is at least rare. With the amendment, Economics Minister Peter Altmaier did his job properly and significantly tightened the control mechanisms for foreign investments in German companies. This will have consequences for communications, especially regarding M&A transactions.
With the reform, the federal government is transposing the EU investment screening regulation into German law, which already came into force in April 2019. According to this European requirement, direct investments from third countries will have to be screened more closely in the future. In doing so, the Federal Government is making full use of the available scope. Henceforth, it will be examined somewhat vaguely whether the acquisition of company shares is “likely to affect” the public security in Germany or Europe. Up to now, only “actual threat” has applied here. As long as this assumed threat has not been definitively clarified, the purchases made will remain pending and thus ineffective. As before, however, the entire regulation only takes effect at an entry threshold of 25 percent. What is new is that this is lowered to 10 percent for companies considered to be particularly relevant to security or defence. These may include energy suppliers or food retailers.
Shopping trips by foreign investors are not a new phenomenon
The issue of better protection for German companies from the shopping trips of foreign competitors or global company raiders has been around in this country for a long time. At least since the takeover of the robotics manufacturer Kuka by a Chinese investor or the failed takeover of the network operator 50Hertz. In the latter case, it was the state-owned KfW Bank that stepped in as a saviour in times of need. By taking over shares themselves, the state bankers were able to prevent a complete takeover – by a Chinese company. An example that the state has not been defenceless in the past either.
As united and proactive as the politicians are on the subject of investment control – the reaction from the business world reads more like not wanting to be rescued at all. The BDI immediately criticized additional hurdles for investments and feared that German companies could be put under “monumental protection”. The influential VDMA even saw the danger of a new “dirigiste industrial policy” and a considerable expansion of government intervention. After all, Germany is dependent on open markets and investments.
Corona crisis promotes protectionism and accelerates capability to act
There is no doubt that the Corona pandemic has done much to speed up and tighten up regulatory intentions. The coalition agreement of the German government still contains a strong appeal for maintaining Germany as an open investment location – even if at the same time there is a commitment to the European plans for improved investment screening. With German SMEs weakened by the crisis because they are dependent on exports, concerns about uncontrolled company takeovers and the associated outflow of know-how obviously weighed heavily. The pressure on politicians to act increased and the otherwise so often observed slow pace of legislative processes disappeared. A phenomenon that could be observed in many political areas during this extraordinary crisis. In the face of the threat, politicians are demonstrating their ability to act – whether in the form of short-term billion-euro guarantees or a comprehensive economic stimulus package.
Foreign trade law slows down M&A activities
The 52 percent decline in global M&A activity in the first half of 2020 is attributed to the Corona pandemic – the global deal volume fell from 2 trillion euros to approximately 1 trillion euros. However, the role of foreign trade law is also the subject of lively debate. Some speak of it as a blessing, others call it a curse. The fact is that investment bankers do not expect a recovery towards pre-crisis levels until 2023. Regardless of the development of the economy and even if the economic crisis takes a V-shaped course.
Although the German M&A market appears to have defied the crisis for the time being – even a slight increase was recorded in the first half of the year – this is primarily due to the strong first quarter with the billion-euro deal for ThyssenKrupp Elevators. In line with the lockdown, the second quarter was correspondingly weak.
Higher barriers and longer investigations
The goal is clear: protect relevant infrastructure. But protectionism will also result in lengthy investigations, which will deter one or another investor, who will then invest his money in other companies and countries. Non-EU money lenders in particular will find it more difficult and will be subject to greater scrutiny, as will large transactions with a volume of over 10 billion US dollars.
But not only will the assessments become lengthier, the new assessment criteria will also become more complex. A new dimension is the question of whether the potential investor is allowed to obtain data and information from systemically important companies at all.
Private equity lies in ambush
If the V-shaped recovery of the German economy proves to be successful, experts expect investment activities to increase after the summer. However, they also expect that especially relevant companies, which are to be protected by the tightening of foreign trade laws, will be among the first to revive the M&A business.
One can therefore expect stronger and longer investigations. Private equity investors in particular could play a role in this. According to the Handelsblatt, experts expect private equity companies to have a total of 1.5 trillion US dollars in capital available for their shopping trips. In Germany, such investment companies have so far provided around a quarter of the capital, but experts now see a prompt increase to around 40 percent as a realistic scenario. Only American investors are expected to play a smaller role in the future.
If the reviews become lengthier and more detailed, especially regarding infrastructure and systemic relevance, the communication of M&A transactions will also become more complex and, above all, more political. DAA therefore cooperates across practices and offers integrated communication advisory from one source, with public affairs experts at our Berlin office and capital market experts in Frankfurt.
Dr Benjamin Seifert, Managing Director in the Corporate & Public Affairs practice and head of the Berlin office, and Daniela Münster, Director in Frankfurt in the Capital Market Communications & Financial Relations practice, will be available to answer your questions or for a meeting.
© picture: iStock