CONSUMER: Midea Cements Kuka Ties, Bumpy Road Ahead

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Bottom line: A new marriage between Midea and Kuka may get off to a rocky start due to cultural differences, but could ultimately do well and see the formation of a joint venture to sell industrial robots in China. 

Midea and Kuka tie the knot

After a tense 2 months, a controversial tie-up between Chinese home appliance maker Midea (Shenzhen: 000333) and German robotics firm Kuka (Frankfurt: KU2) has just taken a major step forward, with the former sharply boosting its stake in the latter. Midea took the $1.3 billion step after providing numerous assurances to Berlin, including guarantees that it didn’t plan to relocate German jobs to China or take over Kuka’s management.

The step forward looks like a big victory for free trade, as it shows that governments like Germany won’t meddle in market-driven M&A and other cross-border tie-ups even when they involve cutting-edge technology. But this new cross-border marriage is just beginning, and I suspect there will be many bumps in the road ahead as this pair from very different cultural backgrounds gets to know each other.

This story began back in May, when reports first emerged that Midea planned to sharply boost its small stake in Kuka as part of a broader alliance. The deal made sense for Midea, which was using Kuka’s technology to upgrade its own production lines in China. Kuka also liked the partnership because it hoped to use Midea’s connections to sharply boost its sales in China, where many manufacturers are making similar upgrades to their production lines.

But EU and German politicians quickly expressed concerns that the deal could rob Europe of one of its leading companies in the fast-emerging field of robotics. Germany also worried about the loss of jobs, since Chinese companies often buy foreign firms and then relocate their manufacturing back to China to lower costs.

Midea promised that it wouldn’t relocate any jobs to China, and also that it would allow Kuka management to remain independent. That was apparently enough to ease the concerns of German politicians, resulting in this latest step forward. That step has seen Midea pay $1.2 billion euros ($1.3 billion) for an additional 25 percent of Kuka from major stakeholder Voith. (English article)

Tender Offer Coming

Midea held 13.5 percent of Kuka’s shares when it first announced its plans in May, meaning its stake in the company would rise to about 38.5 percent following the latest purchase. Under German stock market rules, any stakeholder must make an offer for all of a company’s shares if its holdings rise above 30 percent. That means we can expect Midea to make a tender offer for Kuka’s remaining shares soon, though Midea has said in the past it doesn’t intend to take a majority stake in the German company.

At the end of the day, I expect that Midea will make its offer and may ultimately boost its stake even higher to just above the 50 percent level. I also expect that observers and Germany’s powerful trade unions will be watching closely to make sure Midea keeps its promise about not eliminating any jobs and allowing Kuka’s management to remain independent.

There’s no real reason why this particular marriage can’t work over the longer term, since similar partnerships have succeeded. One of the most similar deals saw Chinese car maker Geely (HKEx: 175) purchase Volvo back in 2010, with an aim to reviving the struggling Swedish car maker by sharply boosting its China presence.

That partnership went through some difficult times in the beginning due to different visions, philosophies and corporate cultures. But after several years it seems to be on a more solid foundation. I expect that Midea will eventually be able to achieve similar goals with Kuka, which could also include establishment of a China joint venture. But I’ve also said from the start that Midea probably could have accomplished most of its major objectives simply by forming a joint venture with Kuka and skipping this equity tie-up.

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