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The Impact of the Geely Purchase of Daimler Benz Shares

2018-04-19 

Art Dicker 

Partner, Pacific Bridge Group

What is Geely up to and what is the impact in Germany?

Hangzhou-based Geely recently acquired 9.7% of Daimler Benz for about US$9 billion. Geely is clearly looking to partner with Daimler Benz and its truck division as China’s logistics demands continue to grow unabated and the demand for self-driving trucks is getting closer to a reality. Although much of the technology driving this transformation is software-based and taking place outside of traditional OEM R&D shops, OEMs are still an indispensable part of the equation and this (along with Geely’s recent acquisition of an 8.2% stake in Volvo Trucks) is Geely’s bet on a long-term trend that seems fairly inevitable at this point. Certainly people predict trucks which are mostly self-driving will be on the road in mass before cars.

(Daimler Benz’s truck division)

While these equity stakes in and of themselves, especially when acquired on the open market, don’t give any access to proprietary technology, Geely now has leverage even as a small but substantial minority shareholder. It has the ability to potentially offload those shares and pulling down the company’s stock price with it – giving it bargaining power to negotiate.

Its notable that Geely’s stake was acquired without making any earlier public disclosures because it had used a combination of options and derivatives to accumulate the equity rights. In effect, because it never took title to the shares until exercising (presumably all at once) its options and unwinding the derivatives, it never needed to technically make any public ownership disclosures. The German Securities Trading Law requires disclosure when voting rights are acquired in public companies at the 3%, 5% and 10% levels.

The ownership was acquired reportedly after Geely was turned down by Daimler Benz from selling a similar amount of shares directly to Geely for fear by Daimler Benz of alienating its joint venture in China, Beijing Automotive (BAIC), which makes 70% of all its vehicles sold in China. Geely was said to have used banks (Bank of America and Morgan Stanley) to acquire the shares on the open market before turning those shares into derivative products or purchasing put and call options together in a “collar trade” to hedge against upward or downward movements in the price while Geely waited to exercise direct ownership. A similar cash-settled option strategy had been used by Porsche to secretly acquire a 30 percent share of Volkswagen in 2008, prompting a reform of the securities trading law on such disclosure requirements.

(Mercedes Benz already has a joint venture with BAIC)

As is often the case, lawmakers are never as sharp as good bankers and lawyers. In addition to tipping off the company’s management, the disclosure requirements would tend to naturally drive up the price once it was known that a buyer wanted to buy a large block of shares. By buying them through in essence smaller 1:1 individual transactions, the price paid is merely in line with the then market trading price – with no real premium in play.

(Geely acquired Volvo’s car business in 2010)

A German parliamentary committee has said it will take a look at whether disclosure rules were violated, although its very likely no technical violations occurred. That certainly does not necessarily change the perception in Germany, already begun in earnest since the acquisition of advanced robotics manufacturer Kuka by Midea in 2016, that Chinese companies are trying to buy up its crown jewels – the advanced technology that makes Germany so competitive in automotive and manufacturing. The reaction in Germany has been swift with an increased desire to craft rules that make such acquisitions more difficult to complete. This is in line with the recent trend, also accelerated in 2017 in the US of nationally security reviews by CFIUS looking at Chinese acquisitions of US high technology companies. The trend seems more or less irreversible at least in the next couple years.

The key takeaway here is that in the short-term, Germany is likely to trend in the same direction as the US in terms of protecting its cutting edge technology companies from outside acquisition and this move by Geely may continue to push that trend. Long-term, let’s hope both China and other countries can find a way to promote trust and a more open trade and investment environment with each other. We may sound like a broken record, but we think joint ventures and other strategic partnerships involving technology licensing, etc., are a great way for companies in both markets to work together, a topic we’ve written about extensively. IP protection will always be a paramount issue, but it can be properly safeguarded if one takes the right precautions.

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