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Bank control, takeovers and corporate governance in Germany
Journal of Banking & Finance 22 (1998) 1385±1403
Bank control, takeovers and corporate governance in Germany Julian Franks a, Colin Mayer
b,*
a
b
London Business School, London, UK Said Business School, University of Oxford, Radclie In®rmary, Woodstock Road, Oxford OX2 6HE, England, UK
Abstract This paper examines the three cases of hostile takeovers in Germany in the post Second World War period. It describes the important role played by banks in aecting the outcome of the bids: bank representatives were chairmen of the supervisory board in all three cases and banks voted a large number of proxies in important decisions affecting the bids. The paper reports that low returns were earned by shareholders of two of the target ®rms and oers an explanation in terms of bank control and the regulatory regime operating in Germany. Ó 1998 Elsevier Science B.V. All rights reserved. JEL classi®cation: G32; G34 Keywords: Takeovers; Bank control; Corporate governance
1. Introduction The recent attempted hostile acquisition of Thyssen AG by Krupp AG has once again brought to the fore the operation of the German corporate governance system and the role of the banks. The banks have been seen to
*
Corresponding author. Present address: Department of Economics, Stanford University, Stanford, CA 94305-6072, USA. Tel.: 1 650 725 7836; fax: 1 650 725 5702; e-mail: [email protected] 0378-4266/98/$ ± see front matter Ó 1998 Elsevier Science B.V. All rights reserved. PII: S 0 3 7 8 - 4 2 6 6 ( 9 8 ) 0 0 0 6 0 - 0
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be instrumental in orchestrating and organising the raid. To some, most notably German steel workers and particular politicians, the banks have abused the social values of the German governance system. To others, they have let shareholders down in failing to push through the bid to the bitter end. Hostile takeovers in Germany are an important subject of study for two reasons. Firstly, there are not many of them: only three in the whole of the post Second World War period. Secondly, although they are the earthquakes of German corporate governance and should not therefore be regarded as examples of normal practice, they do allow us to observe the operation of German corporate governance and the behaviour of banks with an unusual measure of clarity. In addition, they provide an interesting laboratory on how a virtually unregulated takeover market aects shareholder returns. In particular, we want to use the hostile bids to examine two questions: ®rstly, do banks exercise substantial control during these turbulent periods and, secondly, if they do, in whose interests do they act. There is continuing discussion amongst both academics and policy makers about the power of German banks. In principle, concentration of control through proxy votes should encourage more active corporate governance by German banks than by UK and US ®nancial institutions which hold much smaller stakes and large highly diversi®ed portfolios of shares. Since banksÕ own shareholdings are in general modest, where con¯icts arise between shareholder interests and incumbent management, banks may attach less signi®cance to their custodian functions than to the margin and fee income which they derive from commercial and investment banking. Banks may also feel they have obligations to other stakeholders such as employees and managers. We ®nd that banks do exert signi®cant in¯uence over the outcomes of bids, their power in large part deriving from their chairmanship of supervisory boards, and the proxy votes which they cast on behalf of individual shareholders. The latter may be especially important where there are restrictions on voting rights: these limit the votes that large blockholders can cast but not those of banks acting as custodians of small shareholders. We ®nd that returns to shareholders who do not sell their shares to acquirors are very low and even negative in two of the bids. These low bid premia may be explained by banksÕ concern with interests other than those of shareholders; alternatively, they may result from the virtual absence of takeover regulation in Germany. We begin by describing the methodology and data used in the study in Section 2. The three cases of hostile acquisitions are discussed in Sections 3±5. Section 6 analyses the returns to shareholders of the target ®rms, the role of takeover regulation, and the power of the banks. Finally, we derive some conclusions in Section 7.
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2. Methodology and data This paper reports the results of detailed studies of the three cases of hostile acquisitions which have occurred in Germany in the post Second World War period. Jenkinson and Ljungqvist (1996) have correctly pointed out that the incidence of hostility may be much more pervasive than the three cases would suggest. There is an active market in share blocks (see Franks and Mayer, 1997) and the transfers in control to which these trades give rise are often opposed by the management concerned. However, what distinguishes the three cases of hostile bids is that they involve companies whose shares are widely held and where a change in control could not be secured by agreement between a small number of large blockholders. As a result, banks derive a greater degree of control in these cases from their chairmanship of the board and their custodianship of small shareholdings. The three cases are the bid for Feldm uhle Nobel AG by the Flick Brothers in 1988 and then by Veba AG in 1989; the bid for Continental AG by Pirelli AG in 1990 and 1991; and the bid for Hoesch AG by Krupp AG in 1991 and 1992. Case studies of the three hostile takeovers were compiled from original source data. They included company accounts, press reports in both German and UK newspapers and Textline services. They were supplemented by interviews with representatives of the bidder and target, supervisory board members (for example, Dr. Ulrich Weiss, Deutsche Bank board representative and chairman of ContinentalÕs supervisory board and Ellen Schneider-Lenne, Deutsche Bank board representative), investment advisors (for example, Dr. Weickart, advisor to the investment group of Feldm uhle Nobel), investment banks (for example, Morgan Grenfell) and management consultants (for example, McKinsey, Frankfurt). Franks and Mayer (1997) report that 85% of a sample of 171 large companies in 1991 had a single shareholder owning more than 25% of shares. None of the three targets of hostile acquisitions had a single shareholder owning more than 25% of shares prior to the bid. Franks and Mayer (1997) record that banks are represented on the supervisory boards of many widely held companies, frequently in the all-important position of chairman. Data on board composition for the ®rms involved in the acquisitions were collected from Hoppenstedt and Wer ist Wer. In all three target ®rms, Deutsche Bank occupied the position of chairman of the supervisory board. Shares in Germany are held in bearer form and banks act as custodians of individual shareholders. In this capacity they oer a free service to shareholders, whereby the bank will oer advice and vote on behalf of shareholders in company resolutions. They are required to obtain permission annually from shareholders to use their proxies and they must inform shareholders of impending resolutions and how they intend to vote. Nibler (1998) reports that for 38 ®rms the top three banks controlled 29.5% of the votes at the AGMs in
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1991, and the votes for all banks totalled 62.6%. However, for a larger sample of companies totalling 158 ®rms the average held by all banks was 24.7%. This lower percentage is explained by greater concentration of ownership in the larger sample. Consistent with the observation that the targets are widely held, Gottschalk (1988) records that in 1986 the three main banks (Deutsche Bank, Dresdner Bank and Commerzbank) between them held 48% of Hoesch AG and 39% of Continental AG. In the case of Feldm uhle Nobel, Deutsche Bank cast 55% of the votes in a resolution supporting the introduction of a voting right restriction of 5%. Voting right restrictions limit the maximum number of votes which any one shareholder can cast, irrespective of the number of shares which they hold. They are commonly observed in the minority of German companies which are widely held. Continental AG introduced a voting right restriction of 5% in 1984 and Hoesch AG introduced a restriction of 15% in 1977. As described below, the 5% voting right restriction in Feldm uhle Nobel was introduced in 1988 in the middle of the bid by the Flick Brothers. Voting right restrictions are virtually never observed in the large majority of companies which have dominant shareholders, since they undermine the ability of the dominant shareholder to exercise control. In a list of 19 companies which had voting right restrictions in 1988, we found that 17 had no single shareholder owning more than 25% of shares. The performance of the acquisitions was measured by abnormal share price returns relative to the DAX index. Share price data on the bidder and target ®rms were collected from Datastream for the entire period of the bid from the date at which the acquiror started share purchases to the date at which the bid was completed or abandoned. 3. Bid for Feldmihle Nobel AG 3.1. Background to the bid In 1985, ownership of the Flick Group was transferred from Friedrich Karl Flick to Deutsche Bank. The Group included substantial share stakes in other companies and some industrial subsidiaries (Dynamit Nobel, Buderus and Feldhm uhle). The latter were grouped together to form a new company Feldm uhle Nobel. The sale by Flick was made so as to realize a large sum for the payment of taxes; he did not anticipate any family succession. Almost as soon as it took control, Deutsche Bank sold Feldm uhle NobelÕs share stakes in Daimler-Benz, WR Grace and Versicherungs-Holding der Deutschen Industrie for about DM 5.9 billion. In April 1986, the shares of Feldm uhle Nobel were oered for sale at a price of DM 285 per share. The issue was the largest in
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German history (DM 2 billion) and it was the ®rst time that 100% of a companyÕs share capital was oered via a new issue. The issue was also unusual in that the shares were in the form of ordinary voting as against non-voting preference shares. Except for a stake of about 10% held by Deutsche Bank, the shares were widely held. Some believed that the failure of a large stakeholder to emerge re¯ected a lack of industrial logic in the structure of the new company. The combined value of the earlier sales of share stakes, subsidiaries and the ¯otation amounted to DM 7.9 bn. 3.2. The bid In June 1987, Gert-Rudolf Flick and Friedrich Christian Flick, nephews of Friedrich Karl Flick, shareholders in Feldm uhle Nobel, proposed a resolution at the companyÕs AGM that an investigation be undertaken into the sale of shares of WR Grace which took place in 1985. They accused the chairman of Feldm uhle Nobel, Dr. Herbert Blaschke, of failing to obtain the highest price possible in the sale. In June 1988 it was reported that the Flick brothers were attempting to put together a tender oer for the company for a price of DM 350 per share with the clear intention of replacing the management. Following the failure of the bid to materialize, the share price dropped to DM 260. However, it was well known that the Flick brothers and other investors were accumulating a large stake and were being advised by specialists in control contests, a commercial lawyer, Dr. Weickart, and Merrill Lynch. Subsequently, the management learnt that the Flick brothers and others associated with them had a block stake of 36.5% and attempted to forestall any hostile action by proposing a resolution at its AGM restricting the voting rights of any one shareholder to 5% of the total shares outstanding. The resolution was supported by Deutsche Bank which held a share stake of about 8% on its own account and was able to vote a large proportion of the shares through proxies and shares held in investment funds administered by the bank. The resolution was passed with Deutsche Bank voting 55% of the shares cast. Some of the shares had been purchased directly in the market while others had been acquired through the conversion of options bought from institutions with signi®cant stakes. Sellers of the options were required not to reveal information about the transaction for fear of stimulating a rise in the share price. In the latter part of 1988 there were rumors that a takeover bid was again being made for Feldm uhle Nobel. Trading in the shares was unusually high and the share price increased to DM 310. In May 1989, Veba AG declared that it was acquiring a 46% stake, including the stake held by the group of shareholders led by the Flick brothers.
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Veba secured two seats on the supervisory board, one for its chairman, Rudolph von Bennigsen-Foerder, and one other. The former became chairman on 18 July 1989 but died on 28 October 1989. In December 1989, Veba con®rmed that it had increased its stake to just over 50% by buying further shares mainly from investment funds, and expressed its intention to raise its stake to 61%. Unknown to Veba, the Flick brothers had retained a stake in Feldm uhle Nobel either in the hope that von Bennigsen-Foerder would successfully restructure the company, or that Veba would eventually buy them out. However, following the unexpected death of von Bennigsen-Foerder, the new management was less inclined to purchase further shares because of the price that the minority shareholders led by the Flick brothers were demanding. Reluctant to make a full bid at a price required by the minority and unable to take managerial control of the company in the face of opposition from the Flick brothers, Veba put their stake up for auction. In April, 1990, Stora Kopparbergs Bergslags, with another Swedish company, Patricia, acquired a 85% stake in Feldm uhle Nobel at a price of DM 567 and made an oer of DM 540 to small shareholders for the outstanding 15%. Stora purchased 60.1% of Feldm uhle Nobel and Patricia 24.9%. The sellers included Veba (51%), SCA of Sweden(5%) and the Flick brothers (between 10% and 20%). Whereas Stora and Feldm uhle NobelÕs paper activities were thought to be good complements, other activities of Feldm uhle Nobel were to be sold (Dynamit Nobel and Buderus). In June 1990, the voting rights restrictions on Feldm uhle NobelÕs shares were lifted. The head of Veba, Klaus Piltz, vacated his position as head of the supervisory board and was replaced by Dr. Hellmut Kruse, board chairman of Beiersdorf. In August 1990, the takeover was approved by the Cartel Oce. 4. The bid for Hoesch AG 4.1. Background to the bid Prior to the bid by Krupp for Hoesch in 1991, there had been a series of unsuccessful attempts to arrange mergers in the steel industry. In 1981, Krupp approached Hoesch; in 1983 Krupp approached Thyssen; failed negotiations took place with Kl ockner Werke, and in 1989 with Salzgitter. This history of failed friendly mergers convinced Krupp that a merger could only succeed where control could be purchased in the market. Hoesch conformed to these requirements since there was no large industrial stakeholder. The bid by Krupp was motivated by a need to restructure the steel industry which could not be achieved by internal means.
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4.2. The bid In October 1991, Krupp announced the purchase of 24.9% of HoeschÕs shares and expressed a wish to seek a ``close alliance''. Unusually, this was announced without prior consultation with Hoesch. The shares were purchased over a 5 month period from January to June 1991. The accumulation of shares was facilitated by the Gulf War, which caused substantial selling, and by the presence of foreign shareholdings ± 15±18% of the shares were held in London. The success of this bid was crucially dependent on the ability to acquire control covertly through the accumulation of shares before Hoesch could amass support. Secrecy was maintained with a Swiss bank responsible for the transactions; in September it was rumored that a Japanese ®rm was about to bid. None of KruppÕs major banks, including Deutsche Bank, were informed of the share accumulation and the intention to bid. The lack of consultation re¯ected the need for secrecy and the changing relationships of some large companies with their banks. Krupp did not regard any of its banks as the Ôhouse bankÕ. Hoesch called the Krupp purchase unfriendly. Neukirchen, who had become CEO of Hoesch three months before at Deutsche BankÕs instigation, strongly opposed the bid. Neukirchen addressed workersÕ meetings and attacked the merger with Krupp, as did the WorkersÕ Council. As a response, the Hoesch supervisory board considered a programme of restructuring called ``Hoesch 2000''. In addition, talks were initiated with British Steel about taking a blocking minority stake. In November, Krupp announced that, with its own stake of 24.9% and with 30.4% controlled by banks and institutional investors favourable to the merger, it could exercise eective control. It also purchased shares in HoeschÕs convertible, which did not count in any stake that formed the basis of the 25% disclosure rule, prior to conversion. The purchase was necessary to prevent other parties from buying and then converting the shares. Krupp was able to exert eective control with only a slender majority, not the 75% that is frequently cited (see, for example, Franks and Mayer, 1997). Although there were voting restrictions in Hoesch, the limitation was 15% compared with only 5% in Feldm uhle Nobel. As a result, a minority shareholder would have required a large stake of 15% to match the size of KruppÕs votes. The attitude of the banks was mixed. When informed, Deutsche Bank did not oppose the bid possibly recognizing that mergers in the steel industry were necessary and had proved dicult to arrange in the past. WestLB, the one major shareholder in Hoesch, which held about 17% and was also represented on the board of Krupp, did not give public support to the bid and their attitude to the bid was uncertain. This uncertainty may have re¯ected the fact that the
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Land was a major shareholder in the bank and wished to maintain a low public stance in a merger that potentially involved extensive restructurings and a loss of jobs. Late in November, Krupp and Hoesch agreed to merger talks. A share for share exchange was proposed, with the terms to be decided after the businesses had been valued. It was also decided that Neukirchen would leave the management board in the event of a successful merger being negotiated. The success of the bid with only a small majority shareholding therefore came in the face of strenuous opposition from the management board and workers of the target. In December, Krupp increased its share stake to 51%. Subsequently, it was increased to 62% so as to provide the Krupp Foundation, which had a 75% stake in Krupp, with a majority of 54% in the merged company. Other shareholders in Krupp were Iran (25%) and WestLB (10%) and dispersed shareholdings amounted to 10±13%. The acquisition of a majority of the shares ensured that Krupp had control even in the event of the merger failing to take place. In February 1992, trade union ocials listed their demands to Krupp. They included the maintenance of production sites and jobs. Krupp announced that additional job losses resulting directly from the merger, over and above those contained in the ``Hoesch 2000'' plan, would be limited to 1800 from a total of 110,000. However, while this meant that large plants would not be closed, smaller plants were vulnerable. In March, Hilmar Kopper, Deutsche BankÕs chief executive announced his support for the bid because it made ``good industrial sense''. Deutsche BankÕs nominee, Herbert Zapp, was chairman of HoeschÕs supervisory board and Kopper stated that Zapp had no obligation to defend Hoesch against the bid. It was unusual for a bank to support a merger which had been so vehemently opposed by the head of the management board. In March 1992, Krupp announced that it was to be transformed into an AG. In June, Hoesch accepted KruppÕs proposal to merge at its AGM and voted to abolish the voting right restriction. 99.7% of shareholders agreed to the merger. Gerhard Cromme of Krupp and 3 others were voted onto the supervisory board, and it was agreed that Neukirchen would leave the company with a payment of DM 6 million in November 1992. In July, Hoesch announced it was to become part of Fried, Krupp AG Hoesch-Krupp. However, by November 1992 the merger had not taken place because of complaints by three small shareholders to the courts. The court action prevented the immediate registration of the merger. One of the complainants, a former employee of Hoesch, objected to the name of the new company. The other shareholders objected to the treatment of minorities. Subsequently, objections to the merger were dropped and the merger became eective on 8 December.
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5. The bid for Continental AG 5.1. Background to the bid In 1989, Continental and Pirelli were the fourth and ®fth largest tyre producers, respectively, each with approximately 8% of world market share; however, together their turnover fell short of that of either Goodyear or Michelin. At the end of the 1980s serious overcapacity emerged in the tyre industry which necessitated consolidation. Continental purchased General Tyre of the US in 1987 and, in 1988, Pirelli competed unsuccessfully with Bridgestone for ownership of Firestone Tyre of the US. In September 1990 Pirelli announced a proposal to merge with Continental. 5.2. The bid Pirelli proposed a Ôreversed acquisitionÕ. Continental was to acquire the tyre business of Pirelli through Pirelli Tyre Holding of Amsterdam for between DM 1.8 billion and DM 2.2 billion. Half of this was to be ®nanced by a rights issue amounting to an increase in ContinentalÕs capital of between 50% and 60%; the remainder was to be raised through borrowings. Pirelli was to use the payments to increase its share stake in Continental to nearly 28%. Combined with the 23% shareholding held by investors who supported the bid, Pirelli would then have a controlling holding. Pirelli viewed its approach to Continental as a friendly merging of interests in dicult market conditions. However, Continental rejected the oer describing it as a ``hostile takeover with several serious defects''. In particular, it argued that the price proposed by Pirelli for its Tyre HoldingÕs assets was well above ContinentalÕs estimate of its value of DM 800 million. Continental also argued that the borrowings would take PirelliÕs gearing to unacceptably high levels, and that Pirelli had overestimated the gains to the merger at DM 400 million over four years. While rejecting the bid, Continental left open the possibility of negotiations occurring at some future date. However, as a precondition it required Pirelli to give an undertaking that no trade in Continental shares occur for two to three years and no con®dential or sensitive ®nancial information be disclosed while talks were underway. Pirelli refused to give such an undertaking thereby con®rming ContinentalÕs view that the bid was hostile. In December 1990, a private shareholder, Mr. Alberto Vicari, led a small group of Continental shareholders controlling about 5% of Continental shares in calling for an extraordinary general meeting to resolve uncertainty surrounding the merger and to give shareholders the opportunity to express their views about the merger. Two sets of motions were proposed. The ®rst favoured continued independence: they involved raising the majority required to
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overturn the 5% voting right restriction from 50% to 75%, raising the majority required to dismiss supervisory board members from 50% to 75% and requiring a 75% majority to sell important parts of the business. The second set of proposals opened the way for a merger: the voting right restriction would be eliminated and the management required to prepare a merger with Pirelli for the next annual meeting. At the 1989 AGM a proposal to remove the voting restriction had been rejected by a very slender margin of 2%. The Continental supervisory board supported the management board in opposing the bid. They recommended that shareholders vote against the resolutions with the exception of the one requiring a 75% majority to eliminate the 5% voting right restriction. They recommended that shareholders vote against the resolutions requiring 75% majorities for dismissal of members of the supervisory board and disposal of large assets on the grounds that a minority shareholding would then potentially be able to prevent desirable changes in the board and the companyÕs corporate strategy. However, the supervisory board, in particular its chairman, Ulrich Weiss from Deutsche Bank, did not oppose the concept of a merger. Weiss had close associations with several Italian ®rms: he was Deutsche BankÕs board member at Fiat, the Italian car maker closely linked to Pirelli, Chairman of Banca dÕAmerica e dÕItalia and a member of the board of the Fiat automotive group. Through one of these associations he met Leopoldo Pirelli, the Chairman of Pirelli, and early in 1990 Leopoldo Pirelli proposed cooperation between the two companies. There were large share transactions prior to the EGM in March 1991. These created two groups of shareholders: supporters of Pirelli and Continental. As at March 1991, disclosed share stakes were as follows. Pirelli supporters
Continental supporters
Allianz Group 5% Italmobiliare 3% Mediobanca 5% Nord. Landesbank 3% Pirelli Verwaltungs-Gesellschaft 5% Sopaf (Italy) 5%
BMW 5% Daimler-Benz 5% Deutsche Bank 5% Volkswagen 5%
Source: Financial Times 29/7/90.
The suspicion arose that PirelliÕs supporters were acting in concert and thereby violating the 5% voting right restriction. Just before the meeting, Continental wrote to its principal shareholders asking them to declare the amount held, whether they were acting as bene®ciaries for other parties and whether they had entered into indemnities to reimburse any losses or expenses of third parties. Pirelli strenuously denied any such schemes.
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At the shareholdersÕ meeting on 13 March, 66% of shareholders voted in favour of rescinding the voting right restriction. The rule requiring Continental to commence negotiations with Pirelli was defeated. However, elimination of the voting right restriction could not be implemented. In April, two lawsuits opposing the elimination of the voting right restriction were lodged ± one of these was a class action on behalf of minority shareholders. The concern seemed to arise that elimination of voting right restrictions left minority shareholders exposed to the accumulation of share stakes and of discriminatory pricing. On 3 May, in exchange for Pirelli relinquishing their demand for two places on the supervisory board, to which their shareholding entitled them, the supervisory board of Continental voted unanimously (with one abstention) to request the resignation of the Chief Executive Ocer, Horst Urban. The supervisory board wanted negotiations on cooperation with Pirelli to proceed in a constructive way and UrbanÕs presence was viewed as an impediment to this. Wilhelm Winterstein, the longest serving member of the Continental board, was elected as a temporary replacement for Urban and in July he was succeeded by Hubertus von Gr unberg. In June 1991, Pirelli responded by replacing the managing director of Pirelli, Gianbattista De Giorgi; he was felt to be taking too aggressive a stance on the merger to promote constructive negotiations. Thereafter negotiations over cooperation between Pirelli and Continental proceeded steadily. There were discussions about joint purchasing, warehousing and R&D activities. Talks were organised at two levels: strategy was formulated by top management and detailed implementation discussed by heads of divisions. Impetus was given to the negotiations by the worsening ®nancial conditions of the two companies. As late as the end of October 1991 reports appeared suggesting that cooperation pacts were about to be signed before the end of the year but on 1 December the talks collapsed in disarray. PirelliÕs shares plunged 25% and it emerged that Pirelli had oered its Italian allies indemnities for losses sustained contingent on no agreement being reached on a merger by 30 November. PirelliÕs allies had been acting in concert and thereby violating the 5% rule. The indemnities cost Pirelli L 350 billion and considerable loss of face. On 17 February 1992, Leopoldo Pirelli resigned and management control was vested in a seven-member executive committee. 6. Analysis of the bids 6.1. Bid premia and takeover regulation Table 1 records abnormal share price returns measured relative to the DAX of the three targets from nine months before to nine months after the
)1.2%
Continental AG
19.9% 15.0%
16.5%
Hoesch AG
Feldm uhle Nobel AG 1st bid 2nd bid
9 months before
Target
12.0% 12.6%
2.1%
3.7%
3 months before
8.3% 7.4%
)9.5%
)12.8%
1 month before
)0.3% 2.6%
)7.7%
)10.8%
Week of the announcement
Table 1 Cumulative abnormal returns around the announcement of the three hostile takeover bids
0.4% )2.5%
4.2%
0.1%
1 month after
)15.7% )8.2%
)13.0%
)12.2%
3 months after
)20.4% 9.7%
)39.6%
)2.3%
9 months after
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Table 2 Dividends per share (DM) Target
1989
1990
1991
1992
Hoesch AG
1985 5
1986 5
1987 5
1988 8
10
10
n.a.
n.a.
Continental AG
5
6
7
8
8
4
0
Feldm uhle Nobel AG
10
10
10
10
10
12
30
0 n.a.
Source: Annual reports.
bids. Table 2 reports dividends per share of the three companies. In two out of three of the bids (Feldm uhle Nobel and Hoesch) there is no evidence of poor ®nancial performance prior to the bids. There were positive share price movements over nine months prior to the announcement of bids and dividends per share increased or remained unchanged. In the case of Continental, there was little overall movement in its share price over the nine months prior to the bid but there was a reduction in dividends per share in the year of the bid, 1990. There were negative share price reactions to the announcement of the bids for Continental and Hoesch both in the week of the announcement and in the month leading up to the announcement of the bids. Neither bid was opposed and, at least in some respects, was supported by Deutsche Bank. In contrast, the one bid which was resolutely opposed by Deutsche Bank, the attempted acquisition of Feldm uhle Nobel by the Flick brothers, displayed positive share price movements in the month prior to the bid although little movement in the week of the announcement. In no case were bid premia commensurate with those in the UK or the US, between 20% and 30%. The share price movements suggest marked dierences between prices paid for blocks of shares by the Flick brothers and Krupp and those accruing to other minority shareholders. For example, shareholders in Hoesch who sold out prior to the announcement of the takeover received a bid premium of up to 16.5% whereas those who waited for the announcement received a negative bid premium of up to )12.8%. Such price discrimination would not be possible in the UK where the Takeover Code requires bidders to oer a price at least as high as that paid to target shareholders at any time in the previous prior 12 months. There was no equivalent rule in Germany during this period. There are also marked dierences between Germany and the UK concerning two tier oers. In the ®nal bid for Feldm uhle Nobel by Stora, the bidder oered to purchase an 85% stake at a price of DM 567 and DM 540 to small shareholders for the outstanding 15%. In the UK, two tier oers are not permitted. The low bid premiums oered may have been aected by the ability of the bidder to acquire substantial stakes in the market surreptitiously. In Germany,
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a company is required to disclose a stake only when it exceeds 25% of the outstanding equity capital. Furthermore, it is unclear whether the purchase of convertibles or options to purchase other partiesÕ stakes are included in the threshold. Krupp acquired 24.9% of HoeschÕs equity before announcing their stake. They also purchased shares in the convertible and secured the support of other shareholders before the bid so that when the bid was ®rst announced they had control over a majority of the shares. In contrast, in the UK, company legislation prescribes a disclosure threshold of 3% of a companyÕs equity and the Takeover Code requires a company to include convertibles and options in calculating this threshold. Rules regarding voting restrictions and concert parties could also have affected bid premia. The incumbent management of Feldm uhle Nobel thwarted a probable tender oer by the Flick brothers by subjecting their stake of 36.5% to a 5% voting restriction. Pirelli attempted to circumvent ContinentalÕs 5% voting right restriction by encouraging allies to purchase blocks of 5% each and guaranteeing them against loss. Such a concert party is not illegal but is subject to the voting restriction determined by the German courts. As a consequence, when the concert party was revealed, it was deemed to have violated the rules under which the extraordinary General Meeting voting was conducted. In the UK the former chairman of Guinness was sentenced to a jail term for giving guarantees against losses sustained by individuals who promised to vote in GuinnessÕ favour. The ability to discriminate between shareholders means that changes in control can be engineered in Germany at lower gains to shareholders than in the UK; this makes takeovers in Germany cheaper than in the UK and means that restructurings can be organized at lower cost. The failure of the recent bid by Krupp for Thyssen in which it was stated that Krupp would oer all target shareholders the same price may re¯ect the recent growth of shareholder activism and changes to takeover rules in Germany. 6.2. The power exerted by the banks Table 3 summarizes the methods, motives and outcomes of the three bids. Table 4 summarizes the bid tactics and defences which the companies employed. Table 5 records the in¯uence exerted by the banks and their attitude to the bids. Deutsche Bank exerted considerable in¯uence on all three bids. In Feldm uhle Nobel, Deutsche Bank played a key role in introducing a voting right restriction which prevented the Flick brothers from seizing control. The voting right restriction not only prevented the Flick brothers from gaining control, it also prevented control by Veba AG despite the fact that they acquired a majority holding and were favourably inclined to the management of Feldm uhle Nobel. Our interpretation of the BankÕs conduct was that it did not wish to see the break-up of a company which it had so recently brought to the
Date
June 1988
October 1991
September 1990
Target
Feldm uhle Nobel
Hoesch
Continental
Table 3 Summary of three hostile bids
Pirelli
Krupp
Group of investors headed by Flick brothers
Bidder
Tyres
Steel and other steel based activities
Paper, chemicals and explosives
Industry
(1) Merger proposal. (2) Bidder stake. (3) Concert party. (4) Merger negotiation
(1) Accumulated stake of 24.9% by Krupp. (2) Merger negotiations
(1) Accumulation of sharestakes (36.5%). (2) Purchase of stake by Veba. (3) Sale to Stora
Method
Industrial restructuring
Industrial re-structuring, previous failed attempts at friendly mergers
Changing management
Motive for bid
Bid fails (December 1991)
Krupp gains managerial control. Merger held up by courts (July 1992)
Flick brothers sell stake to Veba who is unable to exercise control (September 1990)
Outcome
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Table 4 Bid strategies and bid defences Target
Bid strategy
Bid defence
Feldm uhle Nobel
Ownership ± Covert purchase of 38.5% stake by Flick brothers et al. Veba purchases Flick stake and acquires 51%
Ownership ± Use of proxy votes by ``housebank'' to introduce voting rights restriction
Voting Restrictions ± Limits ability of Veba to take management control
Voting Restrictions ± 5% voting rights restriction introduced after stake purchased by Flick brothers
Supervisory Board Control ± Veba takes 2 seats on supervisory board including Chairman
Supervisory Board Control ± No action
Ownership ± Covert purchase of 24.4% ± Control over additional 30.4% ± Stake increased to 62% to give Krupp majority ownership of merged company
Ownership ± Large shareholder ± West LB does not support bid ± Discussions with British Steel on blocking minority
Voting Restrictions ± No action
Voting Restrictions ± Restriction of 15%
Supervisory Board Control ± Krupp takes 2 seats on supervisory board including Chairman
Supervisory Board Control ± Attempt to extend co-determination to Krupp's steel interests
Ownership ± Pirelli acquires 5% ± Allies acquire 22% ± Pirelli indemni®es allies for potential losses ± Purchases dilute proxies held by banks
Ownership ± Allies (BMW, DaimlerBenz, Volkswagen) purchased shares
Voting Restrictions ± Pirelli attempts to remove restriction
Voting Restrictions ± 5% restriction (1990) Shareholder proposed increasing majority required to overturn voting restriction to 75% ± Accused Pirelli and associates of acting as a ``concert party''
Supervisory Board Control ± Fails to gain any seats on supervisory board
Supervisory Board Control ± No action
Hoesch
Continental
market and it did not believe that there was a need for the bid on industrial restructuring grounds. The bids for Hoesch and Continental illustrate the limitations on the control conferred by proxy votes. In Hoesch, Deutsche Bank installed the head of the management board 3 months prior to the bid by Krupp. However, it was
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Table 5 Position and in¯uence of banks Bank's in¯uence with company
Attitude to bid
Action
Feldm uhle Nobel
Deutsche Bank chaired supervisory board; held stake of 8% Voted large number of proxies
Opposed Flick brothers
Supported voting right restriction
Hoesch
Deutsche Bank chaired supervisory board of Hoesch; had 3 months previously installed new head of management board
Deutsche Bank supported bid even though opposed by head of management board
None
Continental
Deutsche Bank chaired supervisory board; voted large number of proxy votes; closely involved in shaping attitude to the bid
Opposed bid but supported merger talks
Opposed removal of voting right restriction; dismissed head of management board when he opposed merger talks
unable to prevent the bid from taking place because, by covertly acquiring shares in the market, Krupp was able to diminish the proxy votes which the banks could cast. In Continental, the Chairman of the supervisory board engaged in preliminary discussions about the bid and played an important role in replacing the chairman of the management board to facilitate the acquisition. But here too, the signi®cance of the banksÕ proxies in Continental was diminished by the acquisition of share blocks by supporters of both Continental and Pirelli. There is an explanation other than self-interest or impotence for the apparent failure of banks to protect the interests of minority shareholders. Support for the bids by Pirelli for Continental and by Krupp for Hoesch was justi®ed by the required rationalizations of the European tyre and the German steel industries, respectively. 1 These rationalizations imposed considerable costs on workers in the two companies and these would have been still higher if
1 The recent support of the banks for the attempted acquisition of Thyssen by Krupp was also justi®ed by a continuing need for rationalization of the German steel industry.
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large bid premia had been paid. Banks may therefore have been balancing the interests of dierent parties in moderating the gains to shareholders. 7. Conclusion This paper has examined the role of German banks in hostile takeovers in Germany. It has considered the degree of control exercised by banks and whether they acted in shareholdersÕ, their own or some other partyÕs interests. It has also examined the role of regulation in aecting returns to shareholders. The paper has found that banksÕ in¯uence derives from their chairmanship of supervisory boards and the proxy votes which they can cast on behalf of individual shareholders. As the Feldm uhle Nobel case illustrates, proxy votes provide banks with the means to protect minority shareholders. When combined with voting right restrictions, they can require acquirors to purchase nearly all of the shares of a target in the market before gaining control. The fact that the banks did not succeed in securing a bid premium in the bids for Continental and Hoesch suggests that they did not place much weight on shareholder interests. Whether they were in fact frustrated in their attempts to protect minority shareholders by market purchases of proxy votes by the predators or whether their actions re¯ected self-interest or those of other stakeholders is dicult to determine. An alternative explanation is that the low bid premia resulted from ineective regulation. The ability to price discriminate over time and between dierent shareholder groups and to accumulate substantial share blocks without having to disclose them all reduce the cost of acquisition. However, they also mean that minority shareholders stand to earn low or negative returns from takeovers. Acknowledgements This paper is part of an ESRC funded project on ``Capital Markets, Corporate Governance and the Market for Corporate Control'', no. W102251103. It has bene®ted from interviews with numerous individuals in Germany and UK. We are particularly grateful to Gerhard Hablizer of Commerzbank, Ellen Schneider-Lenne and Ulrich Weiss of Deutsche Bank, Charles Lowe of Deutsche Bank UK, Dr. Klaus Christian Hubner and Berndt Jonas of Fried. Krupp AG, Dr. Peter Krailic of McKinsey, Peter von Elten and Andreas Buddenbrock of JP Morgan, Greg Morgan of Munger, Tolles & Olson, Malcolm Thwaites of Morgan Grenfell, Dr. Kiran Bhojani and Dr. Wilhelm Heilmann of Veba AG, Michael Treichl of Warburg, Nicholas Weickart of Weickart, Simon, & Westpfahl, Hans Peter Peters and Andrew Neumann of WestLB.
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References Franks, J., Mayer, C., 1997. Ownership, control and the performance of German corporations. Mimeo. Gottschalk, A., 1988. Der Stimmrechtsein¯uss der Banken in der Aktionarversammlungen der Grossunternehmen, 5 WSI-Mitteilungen, pp. 294±298. Jenkinson, T., Ljungqvist, A., 1996. Hostile takeovers and the role of banks in German corporate governance. Mimeo. Nibler, M., 1998. Bank control and corporate performance in Germany: The evidence. Ph.D. thesis. University of Cambridge.
Bank control, takeovers and corporate governance in Germany Julian Franks a, Colin Mayer
b,*
a
b
London Business School, London, UK Said Business School, University of Oxford, Radclie In®rmary, Woodstock Road, Oxford OX2 6HE, England, UK
Abstract This paper examines the three cases of hostile takeovers in Germany in the post Second World War period. It describes the important role played by banks in aecting the outcome of the bids: bank representatives were chairmen of the supervisory board in all three cases and banks voted a large number of proxies in important decisions affecting the bids. The paper reports that low returns were earned by shareholders of two of the target ®rms and oers an explanation in terms of bank control and the regulatory regime operating in Germany. Ó 1998 Elsevier Science B.V. All rights reserved. JEL classi®cation: G32; G34 Keywords: Takeovers; Bank control; Corporate governance
1. Introduction The recent attempted hostile acquisition of Thyssen AG by Krupp AG has once again brought to the fore the operation of the German corporate governance system and the role of the banks. The banks have been seen to
*
Corresponding author. Present address: Department of Economics, Stanford University, Stanford, CA 94305-6072, USA. Tel.: 1 650 725 7836; fax: 1 650 725 5702; e-mail: [email protected] 0378-4266/98/$ ± see front matter Ó 1998 Elsevier Science B.V. All rights reserved. PII: S 0 3 7 8 - 4 2 6 6 ( 9 8 ) 0 0 0 6 0 - 0
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be instrumental in orchestrating and organising the raid. To some, most notably German steel workers and particular politicians, the banks have abused the social values of the German governance system. To others, they have let shareholders down in failing to push through the bid to the bitter end. Hostile takeovers in Germany are an important subject of study for two reasons. Firstly, there are not many of them: only three in the whole of the post Second World War period. Secondly, although they are the earthquakes of German corporate governance and should not therefore be regarded as examples of normal practice, they do allow us to observe the operation of German corporate governance and the behaviour of banks with an unusual measure of clarity. In addition, they provide an interesting laboratory on how a virtually unregulated takeover market aects shareholder returns. In particular, we want to use the hostile bids to examine two questions: ®rstly, do banks exercise substantial control during these turbulent periods and, secondly, if they do, in whose interests do they act. There is continuing discussion amongst both academics and policy makers about the power of German banks. In principle, concentration of control through proxy votes should encourage more active corporate governance by German banks than by UK and US ®nancial institutions which hold much smaller stakes and large highly diversi®ed portfolios of shares. Since banksÕ own shareholdings are in general modest, where con¯icts arise between shareholder interests and incumbent management, banks may attach less signi®cance to their custodian functions than to the margin and fee income which they derive from commercial and investment banking. Banks may also feel they have obligations to other stakeholders such as employees and managers. We ®nd that banks do exert signi®cant in¯uence over the outcomes of bids, their power in large part deriving from their chairmanship of supervisory boards, and the proxy votes which they cast on behalf of individual shareholders. The latter may be especially important where there are restrictions on voting rights: these limit the votes that large blockholders can cast but not those of banks acting as custodians of small shareholders. We ®nd that returns to shareholders who do not sell their shares to acquirors are very low and even negative in two of the bids. These low bid premia may be explained by banksÕ concern with interests other than those of shareholders; alternatively, they may result from the virtual absence of takeover regulation in Germany. We begin by describing the methodology and data used in the study in Section 2. The three cases of hostile acquisitions are discussed in Sections 3±5. Section 6 analyses the returns to shareholders of the target ®rms, the role of takeover regulation, and the power of the banks. Finally, we derive some conclusions in Section 7.
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2. Methodology and data This paper reports the results of detailed studies of the three cases of hostile acquisitions which have occurred in Germany in the post Second World War period. Jenkinson and Ljungqvist (1996) have correctly pointed out that the incidence of hostility may be much more pervasive than the three cases would suggest. There is an active market in share blocks (see Franks and Mayer, 1997) and the transfers in control to which these trades give rise are often opposed by the management concerned. However, what distinguishes the three cases of hostile bids is that they involve companies whose shares are widely held and where a change in control could not be secured by agreement between a small number of large blockholders. As a result, banks derive a greater degree of control in these cases from their chairmanship of the board and their custodianship of small shareholdings. The three cases are the bid for Feldm uhle Nobel AG by the Flick Brothers in 1988 and then by Veba AG in 1989; the bid for Continental AG by Pirelli AG in 1990 and 1991; and the bid for Hoesch AG by Krupp AG in 1991 and 1992. Case studies of the three hostile takeovers were compiled from original source data. They included company accounts, press reports in both German and UK newspapers and Textline services. They were supplemented by interviews with representatives of the bidder and target, supervisory board members (for example, Dr. Ulrich Weiss, Deutsche Bank board representative and chairman of ContinentalÕs supervisory board and Ellen Schneider-Lenne, Deutsche Bank board representative), investment advisors (for example, Dr. Weickart, advisor to the investment group of Feldm uhle Nobel), investment banks (for example, Morgan Grenfell) and management consultants (for example, McKinsey, Frankfurt). Franks and Mayer (1997) report that 85% of a sample of 171 large companies in 1991 had a single shareholder owning more than 25% of shares. None of the three targets of hostile acquisitions had a single shareholder owning more than 25% of shares prior to the bid. Franks and Mayer (1997) record that banks are represented on the supervisory boards of many widely held companies, frequently in the all-important position of chairman. Data on board composition for the ®rms involved in the acquisitions were collected from Hoppenstedt and Wer ist Wer. In all three target ®rms, Deutsche Bank occupied the position of chairman of the supervisory board. Shares in Germany are held in bearer form and banks act as custodians of individual shareholders. In this capacity they oer a free service to shareholders, whereby the bank will oer advice and vote on behalf of shareholders in company resolutions. They are required to obtain permission annually from shareholders to use their proxies and they must inform shareholders of impending resolutions and how they intend to vote. Nibler (1998) reports that for 38 ®rms the top three banks controlled 29.5% of the votes at the AGMs in
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1991, and the votes for all banks totalled 62.6%. However, for a larger sample of companies totalling 158 ®rms the average held by all banks was 24.7%. This lower percentage is explained by greater concentration of ownership in the larger sample. Consistent with the observation that the targets are widely held, Gottschalk (1988) records that in 1986 the three main banks (Deutsche Bank, Dresdner Bank and Commerzbank) between them held 48% of Hoesch AG and 39% of Continental AG. In the case of Feldm uhle Nobel, Deutsche Bank cast 55% of the votes in a resolution supporting the introduction of a voting right restriction of 5%. Voting right restrictions limit the maximum number of votes which any one shareholder can cast, irrespective of the number of shares which they hold. They are commonly observed in the minority of German companies which are widely held. Continental AG introduced a voting right restriction of 5% in 1984 and Hoesch AG introduced a restriction of 15% in 1977. As described below, the 5% voting right restriction in Feldm uhle Nobel was introduced in 1988 in the middle of the bid by the Flick Brothers. Voting right restrictions are virtually never observed in the large majority of companies which have dominant shareholders, since they undermine the ability of the dominant shareholder to exercise control. In a list of 19 companies which had voting right restrictions in 1988, we found that 17 had no single shareholder owning more than 25% of shares. The performance of the acquisitions was measured by abnormal share price returns relative to the DAX index. Share price data on the bidder and target ®rms were collected from Datastream for the entire period of the bid from the date at which the acquiror started share purchases to the date at which the bid was completed or abandoned. 3. Bid for Feldmihle Nobel AG 3.1. Background to the bid In 1985, ownership of the Flick Group was transferred from Friedrich Karl Flick to Deutsche Bank. The Group included substantial share stakes in other companies and some industrial subsidiaries (Dynamit Nobel, Buderus and Feldhm uhle). The latter were grouped together to form a new company Feldm uhle Nobel. The sale by Flick was made so as to realize a large sum for the payment of taxes; he did not anticipate any family succession. Almost as soon as it took control, Deutsche Bank sold Feldm uhle NobelÕs share stakes in Daimler-Benz, WR Grace and Versicherungs-Holding der Deutschen Industrie for about DM 5.9 billion. In April 1986, the shares of Feldm uhle Nobel were oered for sale at a price of DM 285 per share. The issue was the largest in
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German history (DM 2 billion) and it was the ®rst time that 100% of a companyÕs share capital was oered via a new issue. The issue was also unusual in that the shares were in the form of ordinary voting as against non-voting preference shares. Except for a stake of about 10% held by Deutsche Bank, the shares were widely held. Some believed that the failure of a large stakeholder to emerge re¯ected a lack of industrial logic in the structure of the new company. The combined value of the earlier sales of share stakes, subsidiaries and the ¯otation amounted to DM 7.9 bn. 3.2. The bid In June 1987, Gert-Rudolf Flick and Friedrich Christian Flick, nephews of Friedrich Karl Flick, shareholders in Feldm uhle Nobel, proposed a resolution at the companyÕs AGM that an investigation be undertaken into the sale of shares of WR Grace which took place in 1985. They accused the chairman of Feldm uhle Nobel, Dr. Herbert Blaschke, of failing to obtain the highest price possible in the sale. In June 1988 it was reported that the Flick brothers were attempting to put together a tender oer for the company for a price of DM 350 per share with the clear intention of replacing the management. Following the failure of the bid to materialize, the share price dropped to DM 260. However, it was well known that the Flick brothers and other investors were accumulating a large stake and were being advised by specialists in control contests, a commercial lawyer, Dr. Weickart, and Merrill Lynch. Subsequently, the management learnt that the Flick brothers and others associated with them had a block stake of 36.5% and attempted to forestall any hostile action by proposing a resolution at its AGM restricting the voting rights of any one shareholder to 5% of the total shares outstanding. The resolution was supported by Deutsche Bank which held a share stake of about 8% on its own account and was able to vote a large proportion of the shares through proxies and shares held in investment funds administered by the bank. The resolution was passed with Deutsche Bank voting 55% of the shares cast. Some of the shares had been purchased directly in the market while others had been acquired through the conversion of options bought from institutions with signi®cant stakes. Sellers of the options were required not to reveal information about the transaction for fear of stimulating a rise in the share price. In the latter part of 1988 there were rumors that a takeover bid was again being made for Feldm uhle Nobel. Trading in the shares was unusually high and the share price increased to DM 310. In May 1989, Veba AG declared that it was acquiring a 46% stake, including the stake held by the group of shareholders led by the Flick brothers.
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Veba secured two seats on the supervisory board, one for its chairman, Rudolph von Bennigsen-Foerder, and one other. The former became chairman on 18 July 1989 but died on 28 October 1989. In December 1989, Veba con®rmed that it had increased its stake to just over 50% by buying further shares mainly from investment funds, and expressed its intention to raise its stake to 61%. Unknown to Veba, the Flick brothers had retained a stake in Feldm uhle Nobel either in the hope that von Bennigsen-Foerder would successfully restructure the company, or that Veba would eventually buy them out. However, following the unexpected death of von Bennigsen-Foerder, the new management was less inclined to purchase further shares because of the price that the minority shareholders led by the Flick brothers were demanding. Reluctant to make a full bid at a price required by the minority and unable to take managerial control of the company in the face of opposition from the Flick brothers, Veba put their stake up for auction. In April, 1990, Stora Kopparbergs Bergslags, with another Swedish company, Patricia, acquired a 85% stake in Feldm uhle Nobel at a price of DM 567 and made an oer of DM 540 to small shareholders for the outstanding 15%. Stora purchased 60.1% of Feldm uhle Nobel and Patricia 24.9%. The sellers included Veba (51%), SCA of Sweden(5%) and the Flick brothers (between 10% and 20%). Whereas Stora and Feldm uhle NobelÕs paper activities were thought to be good complements, other activities of Feldm uhle Nobel were to be sold (Dynamit Nobel and Buderus). In June 1990, the voting rights restrictions on Feldm uhle NobelÕs shares were lifted. The head of Veba, Klaus Piltz, vacated his position as head of the supervisory board and was replaced by Dr. Hellmut Kruse, board chairman of Beiersdorf. In August 1990, the takeover was approved by the Cartel Oce. 4. The bid for Hoesch AG 4.1. Background to the bid Prior to the bid by Krupp for Hoesch in 1991, there had been a series of unsuccessful attempts to arrange mergers in the steel industry. In 1981, Krupp approached Hoesch; in 1983 Krupp approached Thyssen; failed negotiations took place with Kl ockner Werke, and in 1989 with Salzgitter. This history of failed friendly mergers convinced Krupp that a merger could only succeed where control could be purchased in the market. Hoesch conformed to these requirements since there was no large industrial stakeholder. The bid by Krupp was motivated by a need to restructure the steel industry which could not be achieved by internal means.
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4.2. The bid In October 1991, Krupp announced the purchase of 24.9% of HoeschÕs shares and expressed a wish to seek a ``close alliance''. Unusually, this was announced without prior consultation with Hoesch. The shares were purchased over a 5 month period from January to June 1991. The accumulation of shares was facilitated by the Gulf War, which caused substantial selling, and by the presence of foreign shareholdings ± 15±18% of the shares were held in London. The success of this bid was crucially dependent on the ability to acquire control covertly through the accumulation of shares before Hoesch could amass support. Secrecy was maintained with a Swiss bank responsible for the transactions; in September it was rumored that a Japanese ®rm was about to bid. None of KruppÕs major banks, including Deutsche Bank, were informed of the share accumulation and the intention to bid. The lack of consultation re¯ected the need for secrecy and the changing relationships of some large companies with their banks. Krupp did not regard any of its banks as the Ôhouse bankÕ. Hoesch called the Krupp purchase unfriendly. Neukirchen, who had become CEO of Hoesch three months before at Deutsche BankÕs instigation, strongly opposed the bid. Neukirchen addressed workersÕ meetings and attacked the merger with Krupp, as did the WorkersÕ Council. As a response, the Hoesch supervisory board considered a programme of restructuring called ``Hoesch 2000''. In addition, talks were initiated with British Steel about taking a blocking minority stake. In November, Krupp announced that, with its own stake of 24.9% and with 30.4% controlled by banks and institutional investors favourable to the merger, it could exercise eective control. It also purchased shares in HoeschÕs convertible, which did not count in any stake that formed the basis of the 25% disclosure rule, prior to conversion. The purchase was necessary to prevent other parties from buying and then converting the shares. Krupp was able to exert eective control with only a slender majority, not the 75% that is frequently cited (see, for example, Franks and Mayer, 1997). Although there were voting restrictions in Hoesch, the limitation was 15% compared with only 5% in Feldm uhle Nobel. As a result, a minority shareholder would have required a large stake of 15% to match the size of KruppÕs votes. The attitude of the banks was mixed. When informed, Deutsche Bank did not oppose the bid possibly recognizing that mergers in the steel industry were necessary and had proved dicult to arrange in the past. WestLB, the one major shareholder in Hoesch, which held about 17% and was also represented on the board of Krupp, did not give public support to the bid and their attitude to the bid was uncertain. This uncertainty may have re¯ected the fact that the
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Land was a major shareholder in the bank and wished to maintain a low public stance in a merger that potentially involved extensive restructurings and a loss of jobs. Late in November, Krupp and Hoesch agreed to merger talks. A share for share exchange was proposed, with the terms to be decided after the businesses had been valued. It was also decided that Neukirchen would leave the management board in the event of a successful merger being negotiated. The success of the bid with only a small majority shareholding therefore came in the face of strenuous opposition from the management board and workers of the target. In December, Krupp increased its share stake to 51%. Subsequently, it was increased to 62% so as to provide the Krupp Foundation, which had a 75% stake in Krupp, with a majority of 54% in the merged company. Other shareholders in Krupp were Iran (25%) and WestLB (10%) and dispersed shareholdings amounted to 10±13%. The acquisition of a majority of the shares ensured that Krupp had control even in the event of the merger failing to take place. In February 1992, trade union ocials listed their demands to Krupp. They included the maintenance of production sites and jobs. Krupp announced that additional job losses resulting directly from the merger, over and above those contained in the ``Hoesch 2000'' plan, would be limited to 1800 from a total of 110,000. However, while this meant that large plants would not be closed, smaller plants were vulnerable. In March, Hilmar Kopper, Deutsche BankÕs chief executive announced his support for the bid because it made ``good industrial sense''. Deutsche BankÕs nominee, Herbert Zapp, was chairman of HoeschÕs supervisory board and Kopper stated that Zapp had no obligation to defend Hoesch against the bid. It was unusual for a bank to support a merger which had been so vehemently opposed by the head of the management board. In March 1992, Krupp announced that it was to be transformed into an AG. In June, Hoesch accepted KruppÕs proposal to merge at its AGM and voted to abolish the voting right restriction. 99.7% of shareholders agreed to the merger. Gerhard Cromme of Krupp and 3 others were voted onto the supervisory board, and it was agreed that Neukirchen would leave the company with a payment of DM 6 million in November 1992. In July, Hoesch announced it was to become part of Fried, Krupp AG Hoesch-Krupp. However, by November 1992 the merger had not taken place because of complaints by three small shareholders to the courts. The court action prevented the immediate registration of the merger. One of the complainants, a former employee of Hoesch, objected to the name of the new company. The other shareholders objected to the treatment of minorities. Subsequently, objections to the merger were dropped and the merger became eective on 8 December.
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5. The bid for Continental AG 5.1. Background to the bid In 1989, Continental and Pirelli were the fourth and ®fth largest tyre producers, respectively, each with approximately 8% of world market share; however, together their turnover fell short of that of either Goodyear or Michelin. At the end of the 1980s serious overcapacity emerged in the tyre industry which necessitated consolidation. Continental purchased General Tyre of the US in 1987 and, in 1988, Pirelli competed unsuccessfully with Bridgestone for ownership of Firestone Tyre of the US. In September 1990 Pirelli announced a proposal to merge with Continental. 5.2. The bid Pirelli proposed a Ôreversed acquisitionÕ. Continental was to acquire the tyre business of Pirelli through Pirelli Tyre Holding of Amsterdam for between DM 1.8 billion and DM 2.2 billion. Half of this was to be ®nanced by a rights issue amounting to an increase in ContinentalÕs capital of between 50% and 60%; the remainder was to be raised through borrowings. Pirelli was to use the payments to increase its share stake in Continental to nearly 28%. Combined with the 23% shareholding held by investors who supported the bid, Pirelli would then have a controlling holding. Pirelli viewed its approach to Continental as a friendly merging of interests in dicult market conditions. However, Continental rejected the oer describing it as a ``hostile takeover with several serious defects''. In particular, it argued that the price proposed by Pirelli for its Tyre HoldingÕs assets was well above ContinentalÕs estimate of its value of DM 800 million. Continental also argued that the borrowings would take PirelliÕs gearing to unacceptably high levels, and that Pirelli had overestimated the gains to the merger at DM 400 million over four years. While rejecting the bid, Continental left open the possibility of negotiations occurring at some future date. However, as a precondition it required Pirelli to give an undertaking that no trade in Continental shares occur for two to three years and no con®dential or sensitive ®nancial information be disclosed while talks were underway. Pirelli refused to give such an undertaking thereby con®rming ContinentalÕs view that the bid was hostile. In December 1990, a private shareholder, Mr. Alberto Vicari, led a small group of Continental shareholders controlling about 5% of Continental shares in calling for an extraordinary general meeting to resolve uncertainty surrounding the merger and to give shareholders the opportunity to express their views about the merger. Two sets of motions were proposed. The ®rst favoured continued independence: they involved raising the majority required to
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overturn the 5% voting right restriction from 50% to 75%, raising the majority required to dismiss supervisory board members from 50% to 75% and requiring a 75% majority to sell important parts of the business. The second set of proposals opened the way for a merger: the voting right restriction would be eliminated and the management required to prepare a merger with Pirelli for the next annual meeting. At the 1989 AGM a proposal to remove the voting restriction had been rejected by a very slender margin of 2%. The Continental supervisory board supported the management board in opposing the bid. They recommended that shareholders vote against the resolutions with the exception of the one requiring a 75% majority to eliminate the 5% voting right restriction. They recommended that shareholders vote against the resolutions requiring 75% majorities for dismissal of members of the supervisory board and disposal of large assets on the grounds that a minority shareholding would then potentially be able to prevent desirable changes in the board and the companyÕs corporate strategy. However, the supervisory board, in particular its chairman, Ulrich Weiss from Deutsche Bank, did not oppose the concept of a merger. Weiss had close associations with several Italian ®rms: he was Deutsche BankÕs board member at Fiat, the Italian car maker closely linked to Pirelli, Chairman of Banca dÕAmerica e dÕItalia and a member of the board of the Fiat automotive group. Through one of these associations he met Leopoldo Pirelli, the Chairman of Pirelli, and early in 1990 Leopoldo Pirelli proposed cooperation between the two companies. There were large share transactions prior to the EGM in March 1991. These created two groups of shareholders: supporters of Pirelli and Continental. As at March 1991, disclosed share stakes were as follows. Pirelli supporters
Continental supporters
Allianz Group 5% Italmobiliare 3% Mediobanca 5% Nord. Landesbank 3% Pirelli Verwaltungs-Gesellschaft 5% Sopaf (Italy) 5%
BMW 5% Daimler-Benz 5% Deutsche Bank 5% Volkswagen 5%
Source: Financial Times 29/7/90.
The suspicion arose that PirelliÕs supporters were acting in concert and thereby violating the 5% voting right restriction. Just before the meeting, Continental wrote to its principal shareholders asking them to declare the amount held, whether they were acting as bene®ciaries for other parties and whether they had entered into indemnities to reimburse any losses or expenses of third parties. Pirelli strenuously denied any such schemes.
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At the shareholdersÕ meeting on 13 March, 66% of shareholders voted in favour of rescinding the voting right restriction. The rule requiring Continental to commence negotiations with Pirelli was defeated. However, elimination of the voting right restriction could not be implemented. In April, two lawsuits opposing the elimination of the voting right restriction were lodged ± one of these was a class action on behalf of minority shareholders. The concern seemed to arise that elimination of voting right restrictions left minority shareholders exposed to the accumulation of share stakes and of discriminatory pricing. On 3 May, in exchange for Pirelli relinquishing their demand for two places on the supervisory board, to which their shareholding entitled them, the supervisory board of Continental voted unanimously (with one abstention) to request the resignation of the Chief Executive Ocer, Horst Urban. The supervisory board wanted negotiations on cooperation with Pirelli to proceed in a constructive way and UrbanÕs presence was viewed as an impediment to this. Wilhelm Winterstein, the longest serving member of the Continental board, was elected as a temporary replacement for Urban and in July he was succeeded by Hubertus von Gr unberg. In June 1991, Pirelli responded by replacing the managing director of Pirelli, Gianbattista De Giorgi; he was felt to be taking too aggressive a stance on the merger to promote constructive negotiations. Thereafter negotiations over cooperation between Pirelli and Continental proceeded steadily. There were discussions about joint purchasing, warehousing and R&D activities. Talks were organised at two levels: strategy was formulated by top management and detailed implementation discussed by heads of divisions. Impetus was given to the negotiations by the worsening ®nancial conditions of the two companies. As late as the end of October 1991 reports appeared suggesting that cooperation pacts were about to be signed before the end of the year but on 1 December the talks collapsed in disarray. PirelliÕs shares plunged 25% and it emerged that Pirelli had oered its Italian allies indemnities for losses sustained contingent on no agreement being reached on a merger by 30 November. PirelliÕs allies had been acting in concert and thereby violating the 5% rule. The indemnities cost Pirelli L 350 billion and considerable loss of face. On 17 February 1992, Leopoldo Pirelli resigned and management control was vested in a seven-member executive committee. 6. Analysis of the bids 6.1. Bid premia and takeover regulation Table 1 records abnormal share price returns measured relative to the DAX of the three targets from nine months before to nine months after the
)1.2%
Continental AG
19.9% 15.0%
16.5%
Hoesch AG
Feldm uhle Nobel AG 1st bid 2nd bid
9 months before
Target
12.0% 12.6%
2.1%
3.7%
3 months before
8.3% 7.4%
)9.5%
)12.8%
1 month before
)0.3% 2.6%
)7.7%
)10.8%
Week of the announcement
Table 1 Cumulative abnormal returns around the announcement of the three hostile takeover bids
0.4% )2.5%
4.2%
0.1%
1 month after
)15.7% )8.2%
)13.0%
)12.2%
3 months after
)20.4% 9.7%
)39.6%
)2.3%
9 months after
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Table 2 Dividends per share (DM) Target
1989
1990
1991
1992
Hoesch AG
1985 5
1986 5
1987 5
1988 8
10
10
n.a.
n.a.
Continental AG
5
6
7
8
8
4
0
Feldm uhle Nobel AG
10
10
10
10
10
12
30
0 n.a.
Source: Annual reports.
bids. Table 2 reports dividends per share of the three companies. In two out of three of the bids (Feldm uhle Nobel and Hoesch) there is no evidence of poor ®nancial performance prior to the bids. There were positive share price movements over nine months prior to the announcement of bids and dividends per share increased or remained unchanged. In the case of Continental, there was little overall movement in its share price over the nine months prior to the bid but there was a reduction in dividends per share in the year of the bid, 1990. There were negative share price reactions to the announcement of the bids for Continental and Hoesch both in the week of the announcement and in the month leading up to the announcement of the bids. Neither bid was opposed and, at least in some respects, was supported by Deutsche Bank. In contrast, the one bid which was resolutely opposed by Deutsche Bank, the attempted acquisition of Feldm uhle Nobel by the Flick brothers, displayed positive share price movements in the month prior to the bid although little movement in the week of the announcement. In no case were bid premia commensurate with those in the UK or the US, between 20% and 30%. The share price movements suggest marked dierences between prices paid for blocks of shares by the Flick brothers and Krupp and those accruing to other minority shareholders. For example, shareholders in Hoesch who sold out prior to the announcement of the takeover received a bid premium of up to 16.5% whereas those who waited for the announcement received a negative bid premium of up to )12.8%. Such price discrimination would not be possible in the UK where the Takeover Code requires bidders to oer a price at least as high as that paid to target shareholders at any time in the previous prior 12 months. There was no equivalent rule in Germany during this period. There are also marked dierences between Germany and the UK concerning two tier oers. In the ®nal bid for Feldm uhle Nobel by Stora, the bidder oered to purchase an 85% stake at a price of DM 567 and DM 540 to small shareholders for the outstanding 15%. In the UK, two tier oers are not permitted. The low bid premiums oered may have been aected by the ability of the bidder to acquire substantial stakes in the market surreptitiously. In Germany,
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a company is required to disclose a stake only when it exceeds 25% of the outstanding equity capital. Furthermore, it is unclear whether the purchase of convertibles or options to purchase other partiesÕ stakes are included in the threshold. Krupp acquired 24.9% of HoeschÕs equity before announcing their stake. They also purchased shares in the convertible and secured the support of other shareholders before the bid so that when the bid was ®rst announced they had control over a majority of the shares. In contrast, in the UK, company legislation prescribes a disclosure threshold of 3% of a companyÕs equity and the Takeover Code requires a company to include convertibles and options in calculating this threshold. Rules regarding voting restrictions and concert parties could also have affected bid premia. The incumbent management of Feldm uhle Nobel thwarted a probable tender oer by the Flick brothers by subjecting their stake of 36.5% to a 5% voting restriction. Pirelli attempted to circumvent ContinentalÕs 5% voting right restriction by encouraging allies to purchase blocks of 5% each and guaranteeing them against loss. Such a concert party is not illegal but is subject to the voting restriction determined by the German courts. As a consequence, when the concert party was revealed, it was deemed to have violated the rules under which the extraordinary General Meeting voting was conducted. In the UK the former chairman of Guinness was sentenced to a jail term for giving guarantees against losses sustained by individuals who promised to vote in GuinnessÕ favour. The ability to discriminate between shareholders means that changes in control can be engineered in Germany at lower gains to shareholders than in the UK; this makes takeovers in Germany cheaper than in the UK and means that restructurings can be organized at lower cost. The failure of the recent bid by Krupp for Thyssen in which it was stated that Krupp would oer all target shareholders the same price may re¯ect the recent growth of shareholder activism and changes to takeover rules in Germany. 6.2. The power exerted by the banks Table 3 summarizes the methods, motives and outcomes of the three bids. Table 4 summarizes the bid tactics and defences which the companies employed. Table 5 records the in¯uence exerted by the banks and their attitude to the bids. Deutsche Bank exerted considerable in¯uence on all three bids. In Feldm uhle Nobel, Deutsche Bank played a key role in introducing a voting right restriction which prevented the Flick brothers from seizing control. The voting right restriction not only prevented the Flick brothers from gaining control, it also prevented control by Veba AG despite the fact that they acquired a majority holding and were favourably inclined to the management of Feldm uhle Nobel. Our interpretation of the BankÕs conduct was that it did not wish to see the break-up of a company which it had so recently brought to the
Date
June 1988
October 1991
September 1990
Target
Feldm uhle Nobel
Hoesch
Continental
Table 3 Summary of three hostile bids
Pirelli
Krupp
Group of investors headed by Flick brothers
Bidder
Tyres
Steel and other steel based activities
Paper, chemicals and explosives
Industry
(1) Merger proposal. (2) Bidder stake. (3) Concert party. (4) Merger negotiation
(1) Accumulated stake of 24.9% by Krupp. (2) Merger negotiations
(1) Accumulation of sharestakes (36.5%). (2) Purchase of stake by Veba. (3) Sale to Stora
Method
Industrial restructuring
Industrial re-structuring, previous failed attempts at friendly mergers
Changing management
Motive for bid
Bid fails (December 1991)
Krupp gains managerial control. Merger held up by courts (July 1992)
Flick brothers sell stake to Veba who is unable to exercise control (September 1990)
Outcome
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Table 4 Bid strategies and bid defences Target
Bid strategy
Bid defence
Feldm uhle Nobel
Ownership ± Covert purchase of 38.5% stake by Flick brothers et al. Veba purchases Flick stake and acquires 51%
Ownership ± Use of proxy votes by ``housebank'' to introduce voting rights restriction
Voting Restrictions ± Limits ability of Veba to take management control
Voting Restrictions ± 5% voting rights restriction introduced after stake purchased by Flick brothers
Supervisory Board Control ± Veba takes 2 seats on supervisory board including Chairman
Supervisory Board Control ± No action
Ownership ± Covert purchase of 24.4% ± Control over additional 30.4% ± Stake increased to 62% to give Krupp majority ownership of merged company
Ownership ± Large shareholder ± West LB does not support bid ± Discussions with British Steel on blocking minority
Voting Restrictions ± No action
Voting Restrictions ± Restriction of 15%
Supervisory Board Control ± Krupp takes 2 seats on supervisory board including Chairman
Supervisory Board Control ± Attempt to extend co-determination to Krupp's steel interests
Ownership ± Pirelli acquires 5% ± Allies acquire 22% ± Pirelli indemni®es allies for potential losses ± Purchases dilute proxies held by banks
Ownership ± Allies (BMW, DaimlerBenz, Volkswagen) purchased shares
Voting Restrictions ± Pirelli attempts to remove restriction
Voting Restrictions ± 5% restriction (1990) Shareholder proposed increasing majority required to overturn voting restriction to 75% ± Accused Pirelli and associates of acting as a ``concert party''
Supervisory Board Control ± Fails to gain any seats on supervisory board
Supervisory Board Control ± No action
Hoesch
Continental
market and it did not believe that there was a need for the bid on industrial restructuring grounds. The bids for Hoesch and Continental illustrate the limitations on the control conferred by proxy votes. In Hoesch, Deutsche Bank installed the head of the management board 3 months prior to the bid by Krupp. However, it was
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Table 5 Position and in¯uence of banks Bank's in¯uence with company
Attitude to bid
Action
Feldm uhle Nobel
Deutsche Bank chaired supervisory board; held stake of 8% Voted large number of proxies
Opposed Flick brothers
Supported voting right restriction
Hoesch
Deutsche Bank chaired supervisory board of Hoesch; had 3 months previously installed new head of management board
Deutsche Bank supported bid even though opposed by head of management board
None
Continental
Deutsche Bank chaired supervisory board; voted large number of proxy votes; closely involved in shaping attitude to the bid
Opposed bid but supported merger talks
Opposed removal of voting right restriction; dismissed head of management board when he opposed merger talks
unable to prevent the bid from taking place because, by covertly acquiring shares in the market, Krupp was able to diminish the proxy votes which the banks could cast. In Continental, the Chairman of the supervisory board engaged in preliminary discussions about the bid and played an important role in replacing the chairman of the management board to facilitate the acquisition. But here too, the signi®cance of the banksÕ proxies in Continental was diminished by the acquisition of share blocks by supporters of both Continental and Pirelli. There is an explanation other than self-interest or impotence for the apparent failure of banks to protect the interests of minority shareholders. Support for the bids by Pirelli for Continental and by Krupp for Hoesch was justi®ed by the required rationalizations of the European tyre and the German steel industries, respectively. 1 These rationalizations imposed considerable costs on workers in the two companies and these would have been still higher if
1 The recent support of the banks for the attempted acquisition of Thyssen by Krupp was also justi®ed by a continuing need for rationalization of the German steel industry.
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large bid premia had been paid. Banks may therefore have been balancing the interests of dierent parties in moderating the gains to shareholders. 7. Conclusion This paper has examined the role of German banks in hostile takeovers in Germany. It has considered the degree of control exercised by banks and whether they acted in shareholdersÕ, their own or some other partyÕs interests. It has also examined the role of regulation in aecting returns to shareholders. The paper has found that banksÕ in¯uence derives from their chairmanship of supervisory boards and the proxy votes which they can cast on behalf of individual shareholders. As the Feldm uhle Nobel case illustrates, proxy votes provide banks with the means to protect minority shareholders. When combined with voting right restrictions, they can require acquirors to purchase nearly all of the shares of a target in the market before gaining control. The fact that the banks did not succeed in securing a bid premium in the bids for Continental and Hoesch suggests that they did not place much weight on shareholder interests. Whether they were in fact frustrated in their attempts to protect minority shareholders by market purchases of proxy votes by the predators or whether their actions re¯ected self-interest or those of other stakeholders is dicult to determine. An alternative explanation is that the low bid premia resulted from ineective regulation. The ability to price discriminate over time and between dierent shareholder groups and to accumulate substantial share blocks without having to disclose them all reduce the cost of acquisition. However, they also mean that minority shareholders stand to earn low or negative returns from takeovers. Acknowledgements This paper is part of an ESRC funded project on ``Capital Markets, Corporate Governance and the Market for Corporate Control'', no. W102251103. It has bene®ted from interviews with numerous individuals in Germany and UK. We are particularly grateful to Gerhard Hablizer of Commerzbank, Ellen Schneider-Lenne and Ulrich Weiss of Deutsche Bank, Charles Lowe of Deutsche Bank UK, Dr. Klaus Christian Hubner and Berndt Jonas of Fried. Krupp AG, Dr. Peter Krailic of McKinsey, Peter von Elten and Andreas Buddenbrock of JP Morgan, Greg Morgan of Munger, Tolles & Olson, Malcolm Thwaites of Morgan Grenfell, Dr. Kiran Bhojani and Dr. Wilhelm Heilmann of Veba AG, Michael Treichl of Warburg, Nicholas Weickart of Weickart, Simon, & Westpfahl, Hans Peter Peters and Andrew Neumann of WestLB.
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References Franks, J., Mayer, C., 1997. Ownership, control and the performance of German corporations. Mimeo. Gottschalk, A., 1988. Der Stimmrechtsein¯uss der Banken in der Aktionarversammlungen der Grossunternehmen, 5 WSI-Mitteilungen, pp. 294±298. Jenkinson, T., Ljungqvist, A., 1996. Hostile takeovers and the role of banks in German corporate governance. Mimeo. Nibler, M., 1998. Bank control and corporate performance in Germany: The evidence. Ph.D. thesis. University of Cambridge.