Foreign Acquisitions of European Photonics Companies—Good or Bad?
The optics and photonics industry is global, where the conventional wisdom is that fair global competition is good in the long run. Capital crosses borders too, and there is no shortage of it—in fact, there is more available capital than ever. But it doesn’t necessarily flow to the right places.
And that’s where foreign investment and acquisitions come in. Are they good or bad? While companies want to compete in foreign markets, they aren't eager to invite competition into their local markets. International mergers and acquisitions can create exits for investors, but a loss of control and possibly a loss of jobs. How should the European photonics industry view these cross-border investments? Can European photonics companies become the ones acquiring other companies, rather than the ones getting acquired? This was part of a discussion at panel hosted by Optical Corporate Membership at the OptecBB Photonics Days Berlin Brandenburg (watch here).
Source: Bill Whitehead, Cartoon Stock
The panelists said that acquisitions cut both ways: they can be good when there are no other opportunities for a small company to grow. However, acquisitions may remove products from the market as the new owner leans into the more profitable business units. Foreign owners can move operations abroad, eliminating local jobs and weakening the community's ecosystem.
The panel discussed "dual shoring" as an option for companies that have complementary strengths. In June, for example, U.S.-based Honeywell announced that its quantum computing unit would form a new company with U.K.-based Cambridge Quantum Computing (CQC), with a new name and majority ownership by Honeywell. The CQC operations will remain in the U.K.
It can go the other way too. Consider Quantum Brilliance, an Australian startup using synthetic diamond in room-temperature quantum computing hardware. The technology was developed in Australia and Stuttgart University. This year, the company began describing itself as an Australian-German enterprise. It opened an office in Stuttgart and declared it to be its official headquarters.
Deals with Chinese investors invite the most scrutiny from government regulators. In February 2021, the assembly/test equipment vendor ficonTEC announced a "structured investment agreement" with the Chinese company RoboTechnik Intelligent Technology. ficonTEC already had an operation in China, and German regulators approved the deal.
In July, Netherlands-based semiconductor supplier Nexperia acquired the U.K.-based foundry service, Newport Wafer Fab. Nexperia was a customer and shareholder in the foundry. For the U.K., it means a foreign acquisition of a wafer fab, one that is based in Europe but owned by the Chinese electronics assembly firm Wingtech Technologies. The deal was approved, but raised concerns all the way to Prime Minister Boris Johnson. One U.S. firm reported that its relationship with the foundry abruptly ended with the sale (here).
What happens to the stock price when there is an acquisition? The Chinese company Midea Group made news in 2017 when it gained majority ownership of KUKA, a German vendor of robotic tools. The acquisition generated concerns that Germany might lose a valuable asset to its economy, but the deal was not blocked by regulators. Exuberant traders bid up the small fraction of KUKA's stock shares available for trading on expectations of strong sales to China. Weak earnings in late 2017 popped the bubble, sending the stock below the €115 price that Midea paid earlier in the year. Meanwhile, KUKA remains in Germany, refuting some of the concerns at the time. This year KUKA's share price is trending up again (see orange line in the figure below).
Stock prices of KUKA and Aixtron on the Frankfurt exchange. Source: Optica (2021).
Compare that to another German company, Aixtron, which assembles equipment that grows epitaxy on semiconductor wafers. An attempted acquisition by a Chinese investment fund was thwarted by the Obama Administration in 2016 based on U.S security reasons. Following this, Aixtron's stock price actually improved. And this year Aixtron has achieved its highest stock price in a decade (shown in the figure in blue, multiplied by five). While we can’t know what would have happened with a different owner, it suggests that the company continues to be valuable without the foreign acquisition.
(The figure also illustrates the cyclic nature of Aixtron's business, with strong stock prices around the Telecom Bubble of the early 2000s, again ten years later with the growth of high-brightness LED manufacturing. And then recently the growth seen another ten years after that.)
Panelists noted that there are many barriers to the free flow of capital and growing businesses: some are deliberate (such as national policies) while others are not (such as stifling bureaucracies and cultural hesitancy).
They said can be easy to start a company in Europe, but often difficult to get it to the next level. In Silicon Valley, there are affordable services that are difficult to find in Europe. The panel also discussed the cultural issue of getting past the “fear of failure” mindset.
But one panelist said that it is easier to start and grow a company today than it was 20 years ago. In Berlin, in particular, there is a change in mindset in the last ten years. There are new generations entering the workforce and running businesses.
To see Optica's panel discussion, click here. For more on the OptecBB Photonics Days Berlin Brandenburg 2021 event, click here.