Global Insight Perspective | |
Significance | The deadlock between Continental and Schaeffler over the latter's hostile takeover bid is resolved after the two companies agreed for the bearings manufacturer to take a 49.99% minority shareholding in Continental. |
Implications | The key to the deal was an improved offer from Schaeffler of 75 euro per share up from its original offer of 70.12 euro. It also appears that the deal has deeply divided the Continental board, as witnessed by the decision of CEO Manfred Wennemer to step down at the end of this month. |
Outlook | The two management teams have hammered out the deal in order to end the counterproductive uncertainty surrounding the bid and should now allow Continental and Schaeffler to work together in creating one of the world's most powerful auto components companies. |
Continental Falls to Schaeffler's Advances
German automotive component and tyre-maker Continental has finally agreed a deal with Schaeffler, following the hostile takeover bid by the bearings manufacturer that has been rumbling on for the past few weeks. According to a press statement, Continental has agreed that Schaeffler can acquire a 49.99% minority share in the company for a four-year period in return for a raised cash offer of 75 euro per share (US$110.63) up from 70.12 euro per share, which was the figure first offered when Schaeffler launched its 11.3-billion euro takeover bid. However, Continental also gave no indication of the significance of the duration of the agreement and what would happen after the four-year period was up. However, one of the most significant pieces of information to come out of the agreement was that Continental CEO Manfred Wennemer has opted to stand down from his position at the end of the month. Continental has not yet named a replacement for the departing CEO. Wennemer was forthright in his attempts to stave off the hostile offer from Schaeffler and as a result masterminded a three-pronged defence strategy that involved Continental trying to attract so-called "white knight" investors, with a number of private equity firms linked to Continental in that capacity. The company was also looking at making a potential acquisition in order to dilute Schaeffler's holdings, and pushing the German financial services regulator Bafin to investigate Schaeffler's use of cash swaps to gain a 36% indirect shareholding in Continental through financial institutions. However, Wennemer clashed with the head of supervisory board Hubertus von Gruenberg over this strategy (see Germany: 13 August 2008: Continental's Management May Be Forced to Talk to Schaeffler) and it appears that the CEO's position became increasingly marginalised as the takeover bid dragged on. It would have been hard for Wennemer to stay in his post given that he described Schaeffler's approach initially as "egotistical, autocratic and irresponsible".
Schaeffler also said in the joint statement that it will not seek to interfere in the company's management strategy—a condition that Continental's management always said was of vital importance for any deal gaining its support. Schaeffler has also agreed not to push unilaterally to change collective bargaining agreements or dilute workers' influence on the supervisory board but the statement made no mention of preserving all jobs or avoiding job cuts. Schaeffler has also agreed that it will not seek to have the company broken up into its constituent units, another of the original fears.
Outlook and Implications
Schaeffler, owned by billionaire widow Maria-Elisabeth Schaeffler and her son, is the world's second-biggest maker of ball bearings. It may seem incongruous that a company that is barely one-third the size of Continental can acquire such an influence in the components giant, but Continental has been vulnerable to a takeover since its own acquisition of Siemens' VDO unit, which has seen the company's stock value fall by 50%. Last week Schaeffler was poised to take full control with its improved 75 euro a share offer, while it was also willing to grant concessions to workers and management, which would have further smoothed the full takeover's progress. This is especially the case as it appears that Continental was running out of options and that its defence strategy had faltered as a result of infighting between the company's supervisory and management. However it appears that Schaeffler has decided to opt for the 49.99% stake as taking a majority shareholding would have meant it would have been forced to undertake the refinancing of Continental's current 11 billion euro of debt, which would have been extremely costly in the current climate. It is possible that after the four-year period mentioned Schaeffler will look to take a majority stake in the hope that the debt re-financing market have recovered by that time. In addition Continental has also reiterated in its statement that its corporate seat, headquarters, business divisions and its listing on the stock exchange cannot be changed without Continental's approval, while its dividend policy and debt-to-equity ratio cannot be altered without consent.
In a further move to reassure shareholders, former German Chancellor Dr. Gerhard Schröder has been brought on board to act as a guarantor for ensuring the interests of all stakeholders of Continental. In addition, the agreement will see the two companies form an automotive components giant that will surpass fellow German conglomerate Robert Bosch GmbH as the world's largest maker of automotive parts.