Why is the USA becoming increasingly important for German SMEs?

German SMEs enjoy an excel­lent repu­ta­tion inter­na­tio­nally, espe­ci­ally in the USA. In our advi­sory prac­tice, we are expe­ri­en­cing — at least in the Mittel­stand and in small & mid-cap tran­sac­tions — an unbro­ken demand from Ameri­can compa­nies for German Mittel­stand compa­nies in key sectors, parti­cu­larly in the areas of mecha­ni­cal engi­nee­ring, auto­ma­tion, IT and medi­cal tech­no­logy — all sectors that stand for inno­va­tive strength, quality and tech­no­lo­gi­cal exper­tise. In recent years, we have been able to assist nume­rous US buyers in the above-mentio­ned sectors with acqui­si­ti­ons and stra­te­gic partnerships. 

From an Ameri­can perspec­tive — regard­less of the current geopo­li­ti­cal uncer­tain­ties — valua­tion levels in Europe are still more favorable in the context of M&A tran­sac­tions than in the USA and, in addi­tion, many German SMEs are charac­te­ri­zed by a tech­no­lo­gi­cal edge, high inno­va­tive strength and stable custo­mer rela­ti­onships, which is clearly decisive for stra­te­gic buyers from the USA. Many SMEs are global market leaders in their niches (“hidden cham­pi­ons”) and offer precis­ely the exper­tise that US compa­nies are looking for in their value chains. Over­all, German SMEs remain a key target for Ameri­can inves­tors — whether through direct acqui­si­ti­ons or stra­te­gic partnerships. 

The basic prin­ci­ples of an M&A tran­sac­tion are simi­lar in both markets; we reco­gnize signi­fi­cant diffe­ren­ces parti­cu­larly in the way compa­nies are approa­ched and deals are struc­tu­red.

Approa­ching target compa­nies in the USA is often more infor­mal and direct than in Germany; howe­ver, the total number of target compa­nies in the USA is often consider­a­bly larger than in Germany. The chall­enge for German buyers in the USA is ther­e­fore to track down all rele­vant “deal oppor­tu­ni­ties” and manage the pipe­line of oppor­tu­ni­ties; a process that is very diffi­cult and time-consum­ing to struc­ture without M&A advi­sors with a local presence. Conver­sely, the chall­enge for US buyers in Germany is that the total number of attrac­tive and available M&A targets in Germany is much smal­ler than in the USA; this means that often “the first shot has to be right”, which is why the USP of a US buyer for a German target company must be worked out even better. 

There are also some diffe­ren­ces in deal struc­tu­ring. For exam­ple, in the USA, buyers and sellers nego­tiate more inten­si­vely on liabi­lity clau­ses, guaran­tees and possi­ble dispute reso­lu­tion mecha­nisms. Another important distin­gu­is­hing feature is the role of earn-out struc­tures, which are used more frequently in the USA to link purchase prices to future busi­ness developments. 

In short, there are a number of “does” and “don’ts”. At TRANSLINK, we are stron­gly attu­ned to the needs of Euro­pean buyers in the US and to the needs of US compa­nies in Europe and have been successfully support­ing compa­nies in the initia­tion, struc­tu­ring and imple­men­ta­tion of inter­na­tio­nal M&A tran­sac­tions in the SME sector for over 50 years. 

Yes, defi­ni­tely. — And this is above all a trend that we see in many family-run SMEs that still have no or only a sub-criti­cal presence of their own in the USA. 

There are seve­ral reasons for this. The USA is one of the most dyna­mic and largest econo­mies in the world, with a huge dome­stic market, still stable growth and a high level of inno­va­tion. The US conti­nues to offer attrac­tive condi­ti­ons for compa­nies, parti­cu­larly in the tech­no­logy, health­care and indus­trial sectors, and attracts US compa­nies with a busi­ness-friendly envi­ron­ment. Tax incen­ti­ves, flexi­ble labor markets and a large custo­mer base make the market extre­mely attrac­tive for German companies. 

And, of course, the chan­ged trade condi­ti­ons and customs regu­la­ti­ons are a new, signi­fi­cant driver. Many German SMEs with a strong export focus are incre­asingly having to deal with trade barriers — espe­ci­ally in trans­at­lan­tic busi­ness. A loca­tion in the USA can be a stra­te­gic solu­tion here in order to be directly present in the target market and circum­vent trade barriers. — In short, we do not see a trend rever­sal as a result of the current uphe­avals; rather the opposite. 

Howe­ver, ente­ring the US market is not trivial — the compe­ti­tive situa­tion is more intense, compli­ance requi­re­ments can be complex and the cultu­ral diffe­ren­ces in busi­ness prac­ti­ces should not be unde­re­sti­ma­ted. Compa­nies that want to grow in the USA should ther­e­fore prepare well and get expe­ri­en­ced advi­sors on board to mini­mize risks and make the most of opportunities. 

Chris­tian Hörner is Mana­ging Part­ner at Trans­link Corpo­rate Finance, one of the pioneers in the cross border small & mid cap M&A advi­sory busi­ness since 1972.

As part of his profes­sio­nal career, he gained expe­ri­ence at a Big Four company and at two invest­ment banks in the areas of M&A, corpo­rate finance and capi­tal markets and lear­ned about the buying and selling proces­ses of DAX and MDAX compa­nies from the ground up. He has over 20 years of expe­ri­ence in the M&A busi­ness and supports finan­cial inves­tors, corpo­ra­ti­ons, medium-sized compa­nies and entre­pre­neurs in the successful imple­men­ta­tion of company sales and acqui­si­ti­ons in Germany and abroad. He is respon­si­ble for the TMT (Tech­no­logy, Media & Tele­com) and Indus­tri­als sector groups at Translink. 

choerner@translinkcf.com