Global Insight Perspective | |
Significance | Siemens has accepted a bid of 11.4 billion euro by Continental for its VDO unit. |
Implications | The VDO unit will complement Continental’s existing Automotive Systems arm from both a technical and regional standpoint. |
Outlook | The acquisition of VDO will provide a huge boost to the growth of Continental and will place it just behind Bosch's automotive division in terms of sales revenues last year. It would be unsurprising to see Continental surpass Bosch in this area in the near term given the synergies and appetite for acquisitions the company currently has. |
According to a press release issued yesterday, Continental AG is to acquire Siemens' VDO Automotive AG unit, beating rival bidder TRW for the business. The price to be paid by Continental for the business will be 11.4 billion euro (US$15.7 billion), making it by far the biggest acquisition in the company's history. As for the financing of the deal, Continental Chief Financial Officer (CFO) Dr Alan Hippe said in a prepared statement that the company had already negotiated favourable terms with the banks and that this will allow the maintenance of a credit rating of at least BBB or Baa2.
Continental Board Chairman Manfred Wennemer said that the price for the VDO unit is "fair" when taking into account the "operational and strategic advantages" involved. He anticipates a potential synergy value of 170 million euro per annum by 2010, with tax advantages of around 1 million euro to be realised in connection with the transaction. Wennemer added that the integration of the business will be completed by the end of 2009, following the approval of anti-trust authorities by the end of the fourth quarter of 2007. The head of the company also stressed that the component supplier will not sell its ContiTech or Tire divisions.
Politicians Welcome The Deal…
After the deal was revealed, the Hannoversche Allgemeine Zeitung reported the positive reaction from German Chancellor Angela Merkel, according to Reuters. Her deputy spokesman, Thomas Steg, told the newspaper: "The chancellor welcomes the decision…The takeover by Continental will strengthen the German car industry." He also added that Merkel had not exercised any political influence to help the deal along.
…But Union Opposes It
One of the largest unions in Germany, IG Metall, has, however, come out against the deal, saying that it was struck without the job guarantees it had asked for. The union’s deputy leader, Berthold Huber, said in a statement that, "Neither Siemens nor Continental was prepared to give employees the concrete covenants in terms of jobs and plant sites [we] demanded for the period of five years", adding that the unions at both businesses had spoken out against the transaction.
Outlook and Implications
This announcement has come around very rapidly, following the tabling of bids last Friday (20 July). Continental had taken an interest in acquiring the VDO unit ever since Siemens said that it was mulling an initial public offering (IPO) in January this year. Reports and statements from Siemens during the following months had suggested that the company had reservations about letting VDO go, but it seems that the lure of the cash offered by Continental was too strong in the end. As well as Continental, TRW also put forward a bid, while it is believed that private equity firms including Kohlberg Kravis Roberts (KKR) had also shown an interest during proceedings.
Dr Karl-Thomas Neumann, executive board member for Continental Automotive Systems (CAS), said of the deal: "In buying Siemens VDO Automotive AG, Continental is taking the logical next step in its evolution to full-range, integrated systems supplier." This expansion will occur in a number of areas that will help CAS widen its portfolio of products. These will include infotainment and telematic systems, a market which Continental has only recently entered following the US$1-billion acquisition of Motorola's North American automotive unit last year; this will be complemented by VDO's roster of telematics, diagnostics, in-car entertainment and navigation systems, and road-toll-charging systems. In addition, the Motorola deal included a control unit and sensor business, which will be bolstered by this latest announcement. Further to this, the deal will bring additional complementary technology to long-term Continental businesses such as its braking and stability control systems units (VDO is developing a brake-by-wire "wedge-brake" system, which is anticipated to have a similar cost and packaging to hydraulic systems by around 2012). The deal will also give Continental greater access to hybrid technologies, which are becoming increasingly prevalent, while some parts of the VDO business will bring new markets into the equation, such as its instrument cluster business, an area where CAS has yet to become involved. As well as the product side, the deal will also expand CAS's global reach in Asia, where it is anticipating sales to double by 2010, and the United States, where only two years ago Siemens acquired the Huntsville (Alabama) electronics plant from DaimlerChrysler (DCX).
However, the takeover may not bode well for workers at VDO. As the relationship between Continental and VDO develops and as integration is stepped up, it is likely that redundancies will occur in the areas of research and development (R&D) and administration. In addition, Continental has a history of moving certain manufacturing functions abroad to areas where labour costs are lower than those at its current facilities.
In any event, should the acquisition be approved, the addition will make Continental one of the heaviest hitters in the industry, with combined sales last year of 25 billion euro, putting it almost on a par with Bosch, which posted sales of around 27 billion euro at its automotive division. In light of the complementary product lines that Continental will now have and its voracious appetite for acquisitions, it would be unsurprising to see it overtake Bosch in this area in the coming years.