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German-Chinese Bureau of Economic Research (GCB) | Three Questions that Target Companies Frequently Ignore

China Economic Bulletin | No. 16 (15 December 2017)

Beyond the Headlines: The Impact on German Firms from Chinese Acquisitions – Part 3 of 5

Three Questions that Target Companies Frequently Ignore

In most cases, when talking about post-merger integration (PMI) success in the business world, people take the buyers’ point of view. Relatedly, even though there have been quite a few publications, especially from consultancies, share the knowhow of success factors in merger and acquisition (M&A), the writers normally talk about what the buyers should do. Nearly nobody mentioned what should the selling company do before, during, and after the deal.¹ A classic view assumes that the targeted companies cannot “do” much since they are the prey, or even worse- the loser, of the corporate governance market. However, such a classic view is frequently untrue regarding Chinese acquisitions in Germany. The majority of these deals are friendly takeovers whose target companies have a bunch of potential acquirers to choose from, in which process the price is not the only determining factor.

Chinese acquirers venture abroad for multiple reasons, including developing international market, acquiring brands and knowhow in the premium segments, portfolio development, etc. Such buying motivations are revenue synergy instead of cost synergy driven and lead to cooperative integration approach. For instance, it seems straight forward that the Chinese acquirer will benefit as an investor by helping the acquired business to enter the Chinese market with its premium product. However, PMI execution is always challenging. The acquired companies need to be critical about the synergy rationale and integration plan, but still be cooperative with the buyer at the same time. In this paper, three crucial questions that are frequently overlooked by the target companies will be discussed.

Question 1: Is our expectation for autonomy realistic?

Nowadays, German target companies involved in Chinese acquisitions seldom worry that the buyers will “shift everything to China and abandon the German facilities”. Such an exploitation approach is not anymore popular among Chinese buyers. The author of this article surveyed a representative sample of Chinese-German deals since 2011² and found that targets of approximately 60% of the deals require some extent of independency after the acquisition. Correspondingly, such a requirement is respected by the Chinese buyers.

However, target companies can still be rightfully concerned if the new shareholders would like to realise cost synergies by combining functions of the two entities. Reducing redundancy by structural integration is widely adopted by acquirers from all over the world, but under the German stakeholder culture, such an approach is met with skepticism. Nevertheless, independency and integration are relative concepts. Every single acquisition requires at least some financial coordination. In around 15% of the deals in which target company required autonomy, different understandings of the right amount of autonomy and integration caused conflicts. This issue is especially challenging when the buyer had a European or German subsidiary before the acquisition. The buyers did promise that there will be neither extensive nor significant integrations after the deal. However, when there are two parallel administrative systems running after the acquisition and they need to be synchronised, no integration not only leads to unjustified costs, but also indicates the lack of cooperation between the two parties and the buyer’s incapability to manage the new subsidiary.

Additionally, to realise synergies that benefit the target, a certain amount of integration is normally unavoidable. For instance, procurement synergy is prevalent among Chinese-German deals. The acquired company can purchase through the mother company to leverage on economies of scale or lower cost sources. However, such procurement adjustment is frequently paired with shifted decision power or even function from the target to the buyer. Additionally, procurement alignment frequently requires intensive communication regarding specifications, logistics, as well as production or order management. Even when decision power remains in the target company, intensive interaction with the mother company may increase the risk of conflicts and leaves an impression of buyer’s intrusion into the acquired business.

The buyer and target of successful deals define “a good level of autonomy” basing on multiple dimensions. In most cases, target’s autonomy must be justified by profitability of the combined business. For instance, when the major synergy source is the target’s expansion in China and the combined business can significantly benefit from such expansions, some buyers are willing to dedicate substantial resource and knowhow to help the acquired company to build its own Chinese subsidiary. This integration approach does not interfere much of the target’s autonomy but the above-mentioned business rationale does not hold true for every Chinese-German deal. Secondly, mutual trust and respect ensure that both parties look at the bigger picture, instead of fighting for every dollar in every situation. For instance, in some production decisions, there is no significant difference between whether a product is made in China or in Germany. However, when the discussed product is a classic in the target’s facility, the buyer is willing to make commitments that the classic products will be produced in Germany. In another deal, the target significantly benefits from the buyer’s economy of scale and the two parties trust each other from very early on. When making platform decisions of one product, the target is willing to join in the buyer’s platform, instead of searching for a perfect platform for itself, to benefit the combined business.

Question 2: Does the buyer have industry and international capability?

Within the studied sample, it is overarching that the target company benefits from buyer’s industry and international knowhow. Buyer’s industry and management capabilities facilitate cooperation between two parties, especially when the buyer comes from developing economies. Moreover, the buyer’s capabilities also help it to reach integration plans that meet both buyer’s and target’s expectation.

First of all, with deep understanding of business and production of the acquired company, a capable buyer knows which functions must be integrated to realise the synergy and which can be left alone at the target. Such a differentiation is challenging because unnecessary integration will lead to target company’s resistance but leaving functions that should be coordinated in different sides will result in operational defects.

Secondly, especially when synergy relates to production, buyer’s industry knowhow will buttress its reliability. No matter whether the target will source from the buyer or via the buyer, the two parties need to share a wide range of knowledge and system regarding quality management, manufacturing management, and IT. It is rare that the buyer and target are identical in above-mentioned areas, but buyer’s industry knowhow helps it to estimate difficulties and move forward to solutions. It is a myth that “made in China” cannot be of high quality. As one top German manager addressed, “as long as iPhone is made in China, you can’t say Chinese is not able to produce high quality products.” Therefore, the company’s capability in respective sphere is much more important than the production location.

On the other hand, buyer’s international business experience can partly compensate for its lack of industry capability, because such buyers are successful in motivating the local management. Additionally, managers from this kind of buyers tend to have better intercultural capability. They may have not worked in the German culture, but they are used to deal with different work styles and are willing to respect the difference. Nevertheless, when integration requires the buyer to play a role or even lead in operational topics such as procurement and production, these buyers tend to lean back and take a conservative approach.

Question 3: Will there be internal competitions?

Internal competitions are more likely to happen in related integrations. In deals under Anglo-Saxon business culture, internal competition can be eliminated quickly through consolidation. The issue is more complicated in Chinese acquisitions in Germany. First of all, there are very few deals driven by consolidation. In other words, it is unlikely that the Chinese acquirer is the German target’s head to head competitor. Even when the two parties are in the same industry, they may serve different segments. Therefore, risks of internal competition may be overlooked by managers. Secondly, because stakeholders expect a cooperative integration approach from Chinese acquirers, consolidation in Chinese-German deals meets more skepticism. Lastly and relatedly, comparing to international names, Chinese acquirers are less confident and capable in consolidating overseas targets, as a result of limited experience. Consequently, even though nowadays Chinese acquirers do not shy away from integration, they tend to avoid structural consolidation.

In nearly half of the surveyed cases, the target and buyer produce similar kinds of products. Among half of these deals, there is no risk of internal competition because the buyers and targets serve different segments which have high barriers of entry. However, in another half, the risk of internal competition exists. All deals tried to solve this issue by portfolio rearrangement, but not all integrations succeeded. In the successful cases, the two parties were completely integrated under one management system. As a result, even though the brands of both parties before the deal continue to exist and prosper after the integration, managers of the combined business can effectively map out a new product portfolio without internal competition. Such an approach is supported by cultural integration efforts and importantly a clear performance orientation. As one manager mentioned, because after the integration, talents from both businesses share the same performance target, they can cooperate in the task level very well, even though he felt that they need a longer time to fully accept each other culturally. By contrast, the only failed case applied a lighter touch integration. Right after the deal, the buyer kept the target in arm’s length to ensure a smooth transfer. Afterwards, when the buyer intended to increase technical and managerial interaction between the two parties, resistance appeared from both sides, most importantly because they did not want to cooperate with a competitor. Interestingly, in one succeeded deal, an initial preservation phase also existed. Nevertheless, when the status of both companies became stable after the deal, the buyer pushed through top management changes and carried out an aggressive integration to structurally merge the two business into one reporting line. Retrospectively, though the external world was critical about the latter case’s aggressive integration, both brands have performed and developed well after the deal. In contrast, though the stakeholders praised the failed case’s acquirer for its preservation of the German brand, we cannot tell, at least for now, if the brand really survived because both the buyer and the target’s business went south after the acquisition.

Clearly, to “preserve the brand” and “avoid consolidation” for their own sake will not protect the acquired business after the deal. From both the target business’ and the stakeholder’s perspective, employment, competitive brand, and long-term development are crucial and all of them base on the target’s business success after the deal. When the risk of internal competition is high but structural integration to eliminate the competition is absent, it is very likely that the risk develops into reality. In this case, the organisations will be overwhelmed by politics and internal power struggle. Consequently, its competitiveness in the market will decrease in the long term.

To sum up, the acquired business should start to ask itself even before the deal: will I develop a competitive relationship with the potential buyer? The expectations that competition will automatically fade out after the acquisition or that the buyer will voluntarily give way to its target are not at all realistic. If managers of the target business cannot confirm that no internal competition is possible in the mid-term, they must be prepared for some organisational changes after the deal, if they want the business to prosper. In the surveyed cases, such organisational changes did not lead to massive layoffs and production transfer, but the successful post-acquisition organisational change requires solidarity and cooperation between the two management teams which come from different national and business culture.

How is the buzzword “cultural difference” perceived in German-Chinese M&A deals? The author will discuss this topic in the next article of this series. 


  1. Examples include Bain & Company (Leung & Yang, 2015), For Chinese companies: Learning the rules for outbound M&A; The Boston Consulting Group (2017), A Proven Framework for Post-Merger Integration; McKinsey & Company (Doherty, Engert & West, 2016), How the best acquirers excel at integration; Roland Berger (Ping, Yeung, Neuner & Chen, 2014), How to integrate overseas acquisitions successfully.
  2. The research is based on in-depth interviews of 10 Chinese acquisitions in Germany and Switzerland during 2011–2015. All deals are majority acquisitions and the target company is renowned player in its industry segment. In the following parts of this article, all percentages and data come from this research, if not otherwise indicated.

References and Literature

Author: Sheryl Tang

Sheryl Tang is a German Chancellor Fellow visiting scholar at the German-Chinese Bureau of Economic Research, an institute of the German-Chinese Business Association (DCW). Her research focuses on the sustainable development of the European businesses that are acquired by Chinese companies. Her research partner in China is Listed Company Research Center, PBC School of Finance, Tsinghua University. Ms. Tang holds a Master’s degree in Organizational Behavior and is M.A. Strategy and International Management candidate of University of St. Gallen. Please write to This email address is being protected from spambots. You need JavaScript enabled to view it. for more information about related topics.

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