Brad Setser

Follow the Money

Cross border flows, with a bit of macroeconomics

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German Government and Business Responses to Sovereign Wealth

by rziemba
August 29, 2008

Note: This piece is by Rachel Ziemba of RGE Monitor, where this piece first appeared.

Last week, the German cabinet approved a new takeover new law which (primarily) would make it easier to block acquisitions of more than a 25 percent stake in German firms by foreign entities not based in the EU if such a purchase might be deemed to pose a threat to public security or order. Sovereign investors especially from Russia, China and possibly the Gulf are likely targets. This is the latest legislation introduced by Merkel’s government which has been trying to put in place an investment review process for some time since the EU overturned the so-called Volkswagen law that limited foreign investment in German companies.  Germany’s renewed process to implement a takeover law were partly triggered in part by a Russian bank’s stake in EADS (see here for a summary)  and past drafts, which could have blocked other EU member states, did not pass EU muster.

German businesses aren’t that happy about the bill even though its thresholds are not necessarily that onerous in comparison to other countries because they fear its sends a protectionist message. Many countries and most G10 nations have a threshold above which deals are assessed for security implications. And in many countries (the U.S. for one the barriers for scrutiny are much lower – 5-10%). Other entities assess for competition policy.

This move is reflective of a move towards greater scrutiny of foreign investment and trade, one prong of a three pronged response to sovereign wealth which also includes pressure on sovereign funds to be more transparent about holdings/risk management and some (very limited) attention to exchange rate management. While concerns of protectionism could of course deter investment, it is the regulatory framework including financial regulation, ease of doing business and profit expectations that influence investment decisions most. But with the economy slowing the politics of foreign investment are heating up.

Thomson notes that Temasek’s bid to take over Shipping company Hapag-Lloyd might be an example of a deal that would produce more scrutiny. The Singaporean government investor is one of several bidding for the company whose workers have called on the government to block the takeover.However others not that it is a container production company not one controlling ports. Given the interest in shipping globally (despite oil prices pushing up transport costs), its not surprising that there is a lot of interest. Ports in the Middle East and North Africa in particular are booming.

Despite the fact that Germany has had less investment from the petrostates (aside from growing trade with Russia and GCC investments in Daimler) – there are clearly some Germany companies seeking out capital or business from sovereign investors, including two that dominated press attention this week.

Siemens has reportedly been seeking a Middle Eastern sovereign partner to take more than 3% (the disclosure threshold in Germany). Perhaps attracted by the recent GE/Mubadala deal in which GE gained an investor and a customer, Siemens might hope to acquire capital and participate in some of the large infrastructure projects planned for the Gulf. Furthermore, a large anchor investor might shield it from activist investors. At the moment the Siemens family with 6% is the only large investor. Of course, for now its not clear that any investors are stepping up to the plate. They might though wait for prices to drop further.

Deutsche Bahn, the national railway company just struck a deal with the state of Qatar to build up the Emirates transportation system. The MoU recently signed between the railway and Qatari Diar, the property focused arm wholly owned by the Qatar investment authority, will cover a multi-stage consolidation of Qatar’s railway. This of course is a partnership that invests in Qatar, not Germany and thus not subject to German political climate.

Both show the increasing role such funds are having with European and American companies that can provide inputs to planned domestic development at home – as sovereign investors try to develop expertise, fast-track infrastructure development and diversify from oil.

German car companies are likely also benefiting from some of the $12 billion that the GCC and Jordan have invested in holding car races in auto companies and motor sports related advertising. Abu Dhabi is planning a Ferrari park, its stakes in SR technic and others, Bahrain has its grand prix etc. The FT noted on Sunday that such investment was but one of the ways that GCC countries were branching into sports sponsorship. Perhaps the Olympics are still on the brain. The jury remains still out on the benefits of sports sponsorship, but GCC countries are clearly hoping it will pay off

On the whole Germany (and most of Continental Europe) has not received as much interest from sovereign investors as the UK or the US… or even Asia for that matter.


Source: publicly available data collected by author and extracted from What Are GCC funds Buying? (available from

The Middle East is clearly a growth market for German goods and possibly a capital source too even if the corporate structure may deter.  In Forbes, Oliver Drebbing writes that “management of several other large German companies were discussing ways of getting anchor investors, in part to also prevent external financial investors from getting access to technical know-how. At the moment, no German industrial giant such as BASF or BMW has managed to grab a large foreign investor, and most continue to have very a fragmented shareholder structure.”

Europe has been divided on sovereign investors. The UK (and perhaps Switzerland) has been among the most welcoming, while France and Germany have been warier. Perhaps this stems from the economic base of the country. While the UK is increasingly a services based economy and attracting capital is a policy priority to promote London as a financial center, Germans have been wary of foreign acquisitions of the industrial base and some officials even longed for a warchest to fend off unwanted suitors. The EU tried to create a coordinated response to stop member states resorting to actual or perceived protectionism. This culminated in an EU position paper that threw its support behind the IMF’s working group of sovereign funds that is trying to create a code of conduct and share best practices of sovereign wealth management. The EU sought to emphasize though that member states already possessed the ability to protect their national security if not their national industries.

Over the past year many countries, particularly those with less than clear foreign investment regimes have begun reassessing their investment regimes. Australia, Canada, the U.S., France, Germany are among the G10 countries reassessing their rules. Many Emerging markets have done so also.  The U.S. has clarified and codified changes in its investment review and lawmakers are taking a closer look at many of the financial oversight and tax policy implications of the regulations. It seems unlikely that any significant tax changes could come to pass before the election – given that there are plenty of tools to block on the grounds of national security.

France has perhaps gone the farthest in Europe – and its law might not quite pass muster with the EU depending on how it is implemented. From Bloomberg: “The French government on Dec. 31 published a decree allowing it to ban foreign investment or takeovers in 11 industries, including computer-network security, casinos and manufacturing of vaccines against bio-terrorist threats.”

Yet some suggest, including the UAE’s central bank governor that barriers abroad, the perception of future barriers (and worries that we may yet to hit bottom) may deter investment – keeping more money at home. While more and more investment is taking place in the MENA region, there are limitations to absorb the capital, especially given global inflationary trends. But sovereign funds are increasingly taking their capital to foreign companies that can contribute to domestic economic development – whether it be education, retail, infrastructure or sporting events.

For more on any of this see related past writings including

What Are GCC funds Buying?

GE/Mubadala post

Responses to Sovereign Wealth Funds: Are ‘Draconian’ Measures on the Way?


  • Posted by Dave Chiang

    We’ll be Worse Off Whoever’s President: Jim Rogers

    Neither of the two contenders for president understands the economy and they are likely to cause more problems than they would solve, investor Jim Rogers, CEO of Jim Rogers holdings, told “Squawk Box Europe” on Friday.

    “Neither one of these guys understands what’s going on, they don’t understand currency markets, economies, they don’t understand the world,” Rogers said. “Both of them are going to cause us more problems than they’re going to solve.”

    ‘Bailing Out their Friends on Wall Street’

    Deep changes are needed in the U.S. system and big Wall Street banks should not be rescued by the authorities when they run into trouble, to avoid moral hazard, Rogers told CNBC Europe.

    “They’re bailing out Wall Street, because all their friends are on Wall Street,” he said. “When Ben Bernanke gets a phone call from the head Lehman, he takes the call, but if some poor school teacher in Oklahoma calls him, he doesn’t take the call.”

    “He’s dealing with his friends on Wall Street trying to save them when in fact he should let them fail. That would be the better solution, at least for 300 million Americans,” Rogers added.

    The economic stimulus package launched this year to try and fend off recession in the U.S. is unlikely to have positive consequences in the long term, despite a higher-than-forecast advance of gross domestic product in the second quarter, Rogers said.

    Supporting troubled investment banks instead of letting them go bust prevents a cleansing of the economy while putting additional burdens on taxpayers, but neither of the two candidates is likely to stop this, he added.

  • Posted by Twofish

    I don’t think that any measures that are being proposed are specifically related to SWF’s, but rather to foreign purchasers. It’s hard for me to think of a case in which a nation would ban an SWF, but would allow an non-SWF merger or acquisition.

    In the case of the United States, I don’t think that any new legislation is needed since Exio-Florio and the Williams Act can handle every situation that I can think of.

  • Posted by fatbrick

    If a government does not want you to buy it, you just do not get it. End of story.

  • Posted by guest

    I agree with fatbrick, and I’d add that Germany has a big surplus. It’s not Lehman’s or USofA case.

  • Posted by Rien Huizer

    The regulations that Germany wants to put in place are very reasonable. Germany has exemplary worker protection, worker representation on company boards etc. All of this helps too keep in place a uniquely German type of politician. German capitalism is no threat to them (no country has as much experience in keeping workers happy, productive and affordable) and the politicians are kind to their capitalists. And foreigners get the opportunity to buy black holes that no German would like to own. I have no idea Hapag Lloyd fits there (probably not, but it is smallish for the container business -incidentally do in Singapore’s NOL, the suitor) but in general, German corporatism know what it wants to keep and what it wants to throw away. Apparently there is a risk that legal technicalities would allow foreigners to get the things Germand would like to keep, hence changing the law would be in order. I guess that the EU bureaucrats will have to watch their words, because germany presents a legitimate case of non-protectionism. Its is a robust democracy where the weirdest political movements are tolerated, layers and layers of checks and balances, very high social indicators and an extremely positive balance of payments. The Germans earn what the southerners waste..So, if NOL wants to buy HAPAG and the German elders do not like it, Spore should look elsewhere, or find a true private sector company to make the acquisition, like little PIL. New laws also work against non-souvereign investment? Sorry, how clever..

  • Posted by Judy Yeo

    Not that such news is a surprise to anyone…

    perhaps the most liberal side of germany these days is the arts & music scene…

    does anyone get the sense that germany is starting to sound more like their norman neighbours…


    be careful, Germany and France may well do what the southerners do if things get any worse. Wouldn’t call what they did to Nokia sensible or diplomatic in any way. Besides, german corporatism has its own dark side, the tax evasion and alleged embezzlement /corruption is just part of it.