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EU fears a rise in hostile takeovers

Srinivas Mazumdaru
April 7, 2020

As the corona pandemic continues to take a severe human and economic toll on nations worldwide, the EU is increasingly worried that it will leave firms vulnerable to hostile takeover bids from foreign investors.

10-euro banknote on grass
Image: picture-alliance/dpa

The massive public health crisis unleashed by the novel coronavirus worldwide has sent markets across the world spiraling. While the market meltdown is bad news for shareholders, it presents a chance for opportunistic investors and corporate raiders to buy stocks at attractive prices.

Authorities in Europe are becoming increasingly worried about foreign investors launching hostile takeover bids to acquire companies in strategic sectors. "Low stock prices represent an opportunity for corporate mergers and restructuring," Guntram Wolff, director of the Brussels-based economic think tank Bruegel, told DW.

"Such restructuring can be welcome if it helps the system to cope with the shock. At the same time, the European Commission and EU member states are aware that in such a situation, strategic assets need to be protected," he added.

The COVID-19 crisis is expected to have a very large negative economic impact on the EU and the euro area. In Germany alone, the ifo economic institute estimates that it could cost the economy over half a trillion euros and more than a million jobs.

Vulnerable times

"The corona crisis looks set to amplify state-owned economic actors' penchant for strategically investing in critical and future sectors of European economies," Jonathan Hackenbroich, a policy fellow for economic statecraft at the European Council on Foreign Relations (ECFR), told DW.

"Now that everyone is vying for outside money, companies could get bought up and know-how and capacity in critical future sectors transferred out of Europe, to China or the US or other countries," he said.

The expert pointed to recent reports suggesting a US bid to acquire German-based company CureVac, which is working on a vaccine for the novel coronavirus. Although the company later denied that a formal offer was made, Hackenbroich said the episode shows the need for Europeans to put in place effective arrangements to thwart such foreign attempts to take over strategic sectors of the European economy.

The European Commission, the EU's executive arm, recently issued guidelines to protect firms against takeovers. "As in any crisis, when our industrial and corporate assets can be under stress, we need to protect our security and economic sovereignty," Commission head Ursula von der Leyen said.

Severe economic impact

In 2016, when the Chinese home appliance maker Midea took over a cutting-edge German robotics firm, Kuka, many in Europe's economic powerhouse were alarmed. The takeover stoked concerns in Germany over losing key high-tech know-how to China.

The German government has since been wary of Chinese and US investors moving to take over key tech firms.

Kuka robot
Robot maker Kuka is now in Chinese hands. The investment had triggered a public debate in Germany about a sell-out of key technologyImage: picture alliance/dpa/K.-J. Hildenbrand

To forestall such acquisitions, Berlin last year proposed a new industrial strategy that increases the government's powers to scrutinize and potentially block takeover bids in strategic sectors of the economy.

It would also allow government ministers to intervene and block whenever a non-EU entity tried to buy a stake of 10% or more in any German firm that's active in key areas such as robotics, biotech, IT security or artificial intelligence, among others.

As the country faced an unprecedented crisis due to the coronavirus pandemic, the German government unveiled a package worth up to €750 billion ($808 billion) to mitigate the damage of the outbreak.

Protecting firms and jobs

In addition to providing financial assistance to companies in need, German Economy Minister Peter Altmaier said Berlin would protect firms from insolvency as well as unwanted takeovers during the crisis with a newly created economy stabilization fund. "Make no mistake, we're determined to stand by our companies and protect jobs," Altmaier said.

The stabilization fund will have up to €100 billion at its disposal and the money can be used to take direct equity stakes in struggling German companies in exchange for injections of cash.

Experts say that in order to thwart hostile takeovers, governments need to identify sectors and specific companies that might be at risk and that are of strategic importance. "They will have to apply a wide definition of strategic importance in this extraordinary crisis," said Hackenbroich, adding: "Authorities should not only fully implement the EU investment screening regulation, but also tighten some of its rules to make it more effective."

For instance, he noted, they could impose tougher penalties on companies for failing to comply with the notification requirement and should also make it impossible for foreign takeovers to go ahead before the governmental review process is over.

Observers argue that richer countries like Germany and France should coordinate their policy with weaker EU member states that don't have the resources to prevent such bids.

"It's in Berlin's and Paris' interest," said Hackenbroich. "We've seen that Chinese takeovers in critical sectors have resulted in blockages at the EU level because member states concerned had grown much more dependent on China."

According to a report published on Tuesday by the German media outlet Funke Mediengruppe, Berlin is planning to tighten investment regulations further to prevent the transfer of technology and know-how until the German government approves an acquisition.

The draft law, formulated by the Economy Ministry, also foresees powers for the authorities to intervene and block mergers and acquisitions in a broad range of sectors. To block an investment from a non-EU entity, the government will no longer be required to prove that there is a genuine threat to public security, the paper reported. Instead, it would suffice to show that there's a "probable adverse impact" on the economy.

The cabinet is expected to approve the bill on Wednesday.