MULTINATIONALS: Europe Joins US in China M&A Alarmism

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Bottom line: Midea’s plan to buy 30 percent of German robotics maker Kuka is likely to collapse due to EU resistance, reflecting growing wariness towards China’s global buying spree of western technology.

EU official sounds alarm at Midea’s Kuka buy

Alarmism at China’s growing string of global M&A is spreading from the US to Europe, with growing signs of resistance to the recently announced purchase by Chinese company of a major stake in a leading German robotics firm. Two separate new headlines point to the nascent resistance against the landmark deal announced 2 weeks ago, which would see Chinese home appliance maker Midea (Shenzhen: 000333) acquire 30 percent of Germany’s Kuka (Frankfurt: KU2G) for more than $1 billion. (previous post) According to the latest reports, a top European Union (EU) industry official and one of Kuka’s largest shareholders are separately expressing reservations about the deal, in what almost looks like a coordinated effort to show the uneasiness some Europeans are feeling.

Frankly speaking, I’ve been somewhat surprised that US alarmism that has scuttled a steady string of recent cross-border M&A from China has taken this long to spread to Europe. Perhaps that’s partly because the US is home to more technology companies, which are one of the preferred targets for Chinese companies as they try to purchase western technology to become more globally competitive.

The latest casualty of such tensions came over the weekend, when Chinese construction equipment giant Zoomlion (HKEx: 1157) announced it was abandoning its efforts to purchase US crane maker Terex (NYSE: TEX) after several politicians voiced reservations about the deal. (English article) Recent Chinese efforts to purchase or buy major stakes of US memory chip giant Micron (Nasdaq: MU) and hard disk drive maker Western Digital (Nasdaq: WDC) have also collapsed due to similar resistance.

According to the latest reports, the EU commissioner for digital economy has voiced his formal reservations about Midea’s plans to buy nearly a third of Kuka, a leading maker of industrial robots. (English article) Guenther Oettinger is quoted in an emailed response to questions saying that Kuka is significant “for the digital future of European industry.” He further suggests that a preferred alternative would be for one of Kuka’s existing European shareholders to step in and buy the stake.

The other development has one of those existing shareholders, the unlisted mechanical engineering group Voith, also saying that Kuka management’s positive stance towards the Midea tie-up is premature. (English article) The CEO of Voith, which holds about a quarter of Kuka’s shares, said he doesn’t understand how Kuka management can be positive about the deal when it has said it is still assessing the offer openly. Hubert Lienhard didn’t say whether Voith would oppose or support the deal, but did say his company was carefully studying whether to hold or sell its Kuka stake.

First Big Test for Europe

If the Kuka deal is ultimately scuttled, it would mark the biggest major case of such a collapse in Europe in China’s recent global M&A drive. In nearly all the collapsed cases, the Chinese firms wanted to acquire technology to upgrade their own production lines back at home. While the US and now the EU have been willing to allow sales of companies from more mature, lower-tech industries, they appear reluctant to see purchases of higher-tech names in emerging and cutting edge industries like robotics and microchips.

Despite the earlier collapse of the Terex and Micron deals, Washington has allowed a number of other high-profile deals to proceed in areas that might be considered sensitive. One of the most recent saw Chinese appliance giant Haier agree to purchase General Electric’s (NYSE: GE) home appliance unit for $5.4 billion earlier this year. Another saw Washington approve the sale of IBM’s (NYSE: IBM) low-end server business to Chinese PC giant Lenovo (HKEx: 992) 2 years ago.

As a longtime observer of such deals, I have to say the latest signals coming from the EU look a bit ominous, especially the ones from Commissioner Oettinger. I’m generally a supporter of free trade, but can also understand how the US and EU don’t want to see key technologies acquired by a political rival like China. Beijing is guilty of its own meddling in by forcing foreign technology companies to disclose their product designs if they want to sell to government organizations. At the end of the day I expect the Midea deal will ultimately collapse like the Zoomlion one did, reflecting a growing wariness in the west towards China’s global M&A ambitions.

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