Ownership without control has a strong oxymoronic flavour. This has done little to prevent the phenomenon from proliferating in corporate finance. Google and Facebook offer investors shares that confer no possibility of influence on management. Owners of this “equity” (an ironic term, under the circumstances) can point to its past appreciation and hope for more of the same. China’s Midea Group cannot legitimately avail itself of this excuse. It wants to buy a big chunk of German industrial automation company Kuka — without, it insists, compromising Kuka’s complete independence or its public listing in its home country.
A tie-up between the two companies could have logic. Midea may benefit from fuller automation of its production, which churns out €19bn of appliances a year. Kuka could benefit from a big partner in a market where it targets €1bn in sales by 2020, implying 25 per cent compound annual growth. And the two could collaborate on non-industrial robots, hybrids of the two group’s core products.
Midea wants more than 30 per cent of Kuka, which under German law requires they make a full tender offer. The offer is €115 a share in cash, a 36 per cent premium that values the target at 45 times 2015 earnings. If all the shareholders go for the cash, the 87 per cent of Kuka that Midea does not own will cost €3.6bn. A just-short-of-majority stake will run to €1.5bn.
Midea has the money. It has a market value of €19bn and its debt burden is light relative to profits. All the same, a partnership does not require an equity stake and a few billion euros can buy a lot of robots. Perhaps Midea’s leaders think Kuka’s shares a good buy, but it is an appliance company, not an investment fund. Another justification is that partial ownership creates alignment of interests. Midea has bought equity stakes in connection with other partnerships and is presumably pleased with the results.
For Midea, this notion may make some sense, given the modest sum involved. On Kuka’s side, considering the size of the opportunity in robotics and the importance of the Chinese market, a few billion euros of equity seems very modest indeed, if it is giving up autonomy in return. Unconflicted control of its strategy and intellectual property is Kuka’s most precious asset. If Midea wants alignment, it should buy the whole company.
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