German tax shake-up threatens UK tech sector

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The Independent Online

Radical changes to Germany's tax and takeover laws are set to unleash a £375bn spree of mergers and acquisitions that could include the takeover of British technology companies.

Radical changes to Germany's tax and takeover laws are set to unleash a £375bn spree of mergers and acquisitions that could include the takeover of British technology companies.

Reforms to Germany's tax system are expected to cause major shifts at almost every level of the country's economy, and vastly increase corporate hunger for foreign purchases.

Germany has fallen behind its rivals in terms of research and development, and analysts predict that German companies will use the changes as a chance to catch up.

From the end of this year, corporate tax will be reduced from 40 per cent to 25 per cent. From 2002, there will be no more capital gains tax on the sale of stakes held in corporates.

Although tax is an issue that investors can usually afford to ignore, the significance of these reforms, which many see as long overdue, is huge.

With no more capital gains tax, German companies are expected to undergo a lightning unwinding of their cross-held shares and non-core assets.

With the cash in hand, they are likely to go bargain-hunting in Europe. They will be particularly focused on the UK technology and biotechnology companies whose shares are currently so battered.

According to Rolf Elgeti, a strategist at Commerzbank: "The freeing-up of 'dead capital' trapped in the hidden reserves of company balance sheets and the redefinition of what is a core business spell an end to the conglomerate culture and a large spurt in M&A."

Mr Elgeti estimates the total value of this process could top 600bn euros (£375bn).

Pan-European analysts are expecting the first round of corporate activity to be largely domestic. With the tax-related inertia removed, German companies will be keen to sell off unwanted assets and cherry-pick acquisitions from others in Germany.

But as companies sell off assets, many will end up with a healthy cash pile that will probably be used to buy up companies abroad.

Under the old tax system, German companies have lagged well behind European rivals in research and development spending. With this issue also resolved by the new reforms, German new-economy companies are now hungry to catch up with their rivals.

UK biotechnology companies will be at the top of the list of takeover targets. One biotechnology analyst said: "Small British companies have led the world in terms of research, but have seen their stock foundering as investors have lost patience with the thin pipeline of good news.

"Many such companies have run down their reserves of cash, and are in no position to take the next logical step of consolidating. German pharmaceutical companies with a boost of cash will certainly want to take advantage of this."

Technology companies whose main asset is their research will also be attractive to German corporates. To date, German takeover law has not made this process straightforward, but in this area too major changes are afoot.

The German government has now announced a new bill that could end in a takeover law based on the EU directive on the subject.

Klaus Scholte, a strategist at Dresdner Kleinwort Wasserstein, said: "The timing of this is significant. The tax reforms are going to give German corporations a lot of cash, and the takeover legislation gives them the ability to start spending it across Europe."

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