M&A Digest

Werner Specht
Werner Specht
M&A Consultant


Why Germany is Ripe for Investment

GGI: Why is this a good time for foreign investors in Germany?
Werner Specht: Germany has the biggest national economy within the European Community--and is number three worldwide. After a few years of slow growth, the German economy is growing by 1.7 to 2.0%. The country is known for its excellent infrastructure, high-tech industry, high-quality products and well-trained people. A recent survey among more than 1000 international companies rated Germany as the most attractive country in Europe, and one of the top three in the world. In addition, German industry is oriented toward doing business internationally. Forty percent of all goods manufactured in Germany are exported.

GGI: Are you already seeing signs of more foreign investment in Germany?
WS: Yes, according to recent studies, financial investors have spent close to 21 billion Euros in acquisitions during the first six months of 2006. This trend is expected to continue, as interest rates are still rather low and companies continue to divest side activities and concentrate on their core business. Investors are also buying smaller privately-held companies whose owners want to retire, but who have no successor to take over. This is mainly true for private individuals who set up their own companies after World War II. Most of the time, however, the kids aren't willing to take over--which leaves many privately-owned companies searching for successors.

GGI: How does foreign investors' renewed interest in the German market affect German business?
WS: As international companies and private equity investors "invade" Germany, valuations go up. Interestingly, we are finding that a valuation gap has opened in which companies that are sold to primarily international investors reach considerably higher valuations than companies that are sold to primarily German buyers.

GGI: What is the reason for this price dichotomy?
WS: In the US, and to a lesser degree in the UK, there is a lot of money going around looking for value. In fact, in these countries, valuations appear to be overheating. The main reason is the endless supply of pension-fund money looking for returns--and to a lesser degree the highly-developed stock markets. In Germany you don't have that kind of pension fund money, and the stock market is less mature. As a result, historically, there has not been an upwards pressure on valuations as you find in the US.

GGI: So, how does this create the price dichotomy?
WS: In contrast to the US and UK, only a small number of German companies are traded at the stock exchange--and there aren't pension fund investors. If German companies buy other businesses, they have to finance them out of their cash-flow. Debt-financed deals tend to lead to lower valuations.

GGI: Many investors associate Germany with difficult labor laws and high taxes.
WS: Corporate taxes have been continually reduced in recent years. The new German government has just decided to reduce the tax burden for corporations further; from an average of 39% to below 30% in 2008. I don't think the labor laws are difficult. You just have to deal with it and follow the rules.

GGI: How can GGI help German sellers to achieve the highest possible price?
WS: GGI’s biggest advantage is that that its team has a great deal of experience in both the US and Europe. They do many deals across the ocean.

GGI: What is the advantage for someone who is interested in divesting all or part of his business?
WS: GGI can attract the right strategic partner. The result will be a good fit at the right price.