Rethinking M&A transactions from a European perspective

Rethinking M&A transactions from a European perspective

German companies are increasingly having to reposition themselves in the area of tension between the USA and China. You should keep an eye on these opportunities and risks.

As an export nation, Germany is more dependent than most other nations on sales markets around the world. The last decade has shown SMEs (small and medium-sized enterprises) that Germany's "going it alone" approach within Europe has no future in the face of the challenges of the 21st century.

In an increasingly conflict-ridden world, new alliances must be made and existing ones renegotiated, above all with the world powers USA and China. It is therefore of great importance for company management to be able to correctly assess the risks and opportunities in the field of tension of the global economy.

The current status: Welcome to a multipolar world

The claim to leadership in the eastern hemisphere is being raised by the world power China. This has significantly led to a reorientation of American economic policy. The process is in full swing and Europe too must reassess its multilateral trade policy towards the West and East.

Both world powers, the USA and China, are trying to strengthen their position through alliances in their own interest. For this reason, but also because of the Ukraine war, it was obvious for the American Biden administration to pick up on earlier traditions of the transatlantic partnership. For example, energy sources are to be delivered to Europe. This will enable the United States to further strengthen its alliances.

The Western, largely newly closed front against Russia has sensitized China's expansion efforts. Negative effects are already clearly visible in China's fight for Hong Kong. Various companies are relocating their Asian business to Singapore. In order not to act against its own interests, China is required to reconsider its strategy with regard to Hong Kong, Taiwan and the West.

Other rising economic powers, such as India, want to have their own position in international affairs. Indian Foreign Minister Subrahmanyam Jaishankar positions his country on the side of peace, respect for international law and support for the UN Charter. However, India intends to maintain its proven relations with Russia. With the takeover of the G20 presidency, a mediating role in the Ukraine war is conceivable.

In addition to its own efforts to be an economic leader, Europe, as the world's largest single market, has a not insignificant negotiating weight. The aim is to create a balance between the two world powers. Conversely, having parallel access to both markets is becoming more and more complex for Europe. For this reason, it is becoming increasingly important to spread risks, for example across several trading partners.

What will happen next: Trade policy with the US and China remains difficult

Biden's term in office will see a continuation of the protectionist trend of the Trump years. In the future, European companies will probably be forced to produce more directly on site in the USA. One example is the Inflation Reduction Act (IRA). The US government is supporting domestic industry in the field of climate-neutral technologies with 400 billion dollars. A passage in the IRA states that electric cars are only subsidized with a maximum tax rebate of 7,500 dollars if they are manufactured in the US. The Americans are pursuing a strategy similar to that of China.

Newly established manufacturing processes in the target markets, so-called horizontal investments, are intended to replace direct exports from the countries of origin. It is therefore not surprising that more and more German companies are expanding their sites in North America. Alternatively, suitable company acquisitions can be an interesting market entry strategy. In addition to supply chain issues, rising transportation costs are also fueling the trend towards M&A transactions that create regional proximity to sales markets or major customers.

From a European perspective, the extent to which China changes its stance on existing market access restrictions and lack of intellectual property protection will have a direct impact on new coalitions and collaborations. And China is threatened by further centrifugal forces from the game changer India.

In this dynamic environment, the pressure on China to open up is increasing. This is also reflected in company acquisitions by foreign players in Europe. For example, buyers from the US have recently been able to assert themselves more frequently in M&A processes than Chinese potential buyers. One reason for this is certainly China's political control of the current financial and real estate crisis, including state capitalism.

Conclusion: More opportunities through market diversification

Since the outbreak of the corona pandemic and the Ukraine war, most European companies have been looking to improve the resilience of their processes and structures. More stability, however, cannot be created by turning inward. Instead, companies should spread their risks in the global system.

In addition to transformation processes driven by the energy transition, digitization and automation, strategic motives relating to procurement and sales markets also influence a company's own corporate strategy. M&A as an instrument of strategic corporate development and safeguarding in a globalized world opens up interesting alternatives, especially for medium-sized enterprises. Forward-thinking companies should therefore update their M&A roadmap to be able to make the right decisions in a multipolar world.

Link to the article (German):