The fear and loathing generated by Krupp’s attempted takeover of Thyssen, a rival German steel company, has not only thwarted that particular deal but also put back the entire German M&A business by several years.
No sooner had Krupp’s plan to take over its rival and create one large steel company in the Ruhr been leaked last month than Thyssen cried fraud and the term feindliches Angebot (hostile takeover) replaced “shareholder value” as the phrase of the moment in German business thought.
In fact, claim Krupp’s advisers Goldman Sachs, Deutsche Bank and Dresdner Bank, this was not a hostile takeover, merely a fairly persuasive invitation to hold merger talks urgently. The banks believed that Thyssen would be won over by what they described as “compelling” arguments in favour of the deal, particularly as Thyssen’s management had already expressed its belief in the principle of shareholder value.
But Thyssen’s chief executive, Dieter Vogel, reacted in an unexpected way. Rather than negotiate, he chose the path of public resistance and quickly mobilized his workforce of 50,000 steelworkers against the act of alleged hostility.
Soon Vogel changed his mind, and began merger talks with Krupp’s chief executive, Gerhard Cromme. But Vogel’s opinion never really mattered: the power of public opinion had already been unleashed. Thyssen workers turned up in their thousands to demonstrate beneath the twin towers of Deutsche Bank, the bank that the German popular imagination regards as the main financier of unwelcome change and restructuring in the German economy. Deutsche Bank would destroy their jobs, they said.
Analysts of that industry say mega-mergers in German steel are inevitable in the long run and cite the success of Krupp’s 1990 takeover of Hoesch, once just another loss-making steelmaker in the Ruhr. But German politicians particularly the centre-left SPD which rules in the Ruhr region still disagree. They, too, have condemned the bid for Thyssen as an indecent proposal bound to destroy business ethics as well as jobs, the independence of a venerable local company and the support of thousands of voters.
Relations between politicians and the private-sector banks in Germany are so strained that the banks have been unable to persuade politicians the bid might make sense. If any other industry had been involved, the issue would have been less emotive. But German steel is heavily subsidized and highly political; the Krupp bid also came in the wake of a painful debate over long-term subsidies to the mining industry.
So the big banks came under attack, and the government looked on. Only Goldman Sachs, which is almost unknown to the public in Germany, escaped any kind of criticism, which is ironic given that it played a dominant role as an adviser on the Krupp approach and co-underwriter of Dm15 billion ($8.9 billion) in financing for it.
Deutsche Bank appears to have made a mistake by basking in the limelight of a leading role in a deal that was supposed to show German companies embracing the need for US-style corporate restructuring and, no doubt, demonstrate its own investment banking prowess. It was Goldman that was first mandated by Krupp to advise on the takeover; Deutsche and Dresdner were brought in as financiers much more recently.
Despite the slings and arrows, Deutsche and Dresdner cannot afford to miss advisory mandates in such important deals. “As a successful investment bank we can’t just let others do it,” Deutsche’s chief executive Hilmar Kopper said at the height of the fuss. Citing Deutsche Morgan Grenfell’s role as adviser to France’s Auchan retailing group in last year’s fairly hostile acquisition of Docks de France, he points out: “We’ve done a lot of hostile things in other countries. Such things are possible in France.” But not, apparently, in Germany.
The politicians’ fury was hardly unexpected. What scuppered the deal was Thyssen’s righteous rage about two bankers, Ulrich Cartellieri of Deutsche Bank and Bernhard Walter of Dresdner Bank. As board members of their banks, Cartellieri and Walter evidently knew about the Krupp bid (although Walter refuses to confirm this). At the same time they were supervisory board members at Thyssen and failed to warn the company of the imminent offensive from its main domestic competitor.
Unlike US corporations, German companies are still not adept at handling their bankers’ conflicts of interest. The bankers themselves hardly encourage them to consider it either, since the minimal workload of corporate board membership has been rewarded with valuable corporate finance and underwriting mandates, and also gives bankers the best insight into the company’s true financial position. German bankers are torn between the desire to win M&A advisory mandates and the wish to preserve their ties to industrial companies. “This will force us to think again about [these mandates] and their implications for our house bank relationships,” says Cartellieri. But those ties can also be strengthened by long-term advisory relationships, and the banks now believe that supervisory board seats are more trouble than they are worth.
In future, Deutsche Bank for one will be more careful, probably by declaring an interest and leaving the room if rival clients are discussed in supervisory board meetings. In fact, Deutsche and Dresdner may use this opportunity to shed several troublesome supervisory board positions altogether. Cartellieri was expected to resign from the Thyssen supervisory board at its meeting on March 27, and Walter was prepared to do the same if asked.
The irony is that this was not a hostile takeover at all in the conventional sense, since neither Krupp nor its bankers secretly bought up Thyssen stock on the market a tactic that is still legitimate in Germany. In fact, there has never been a successful takeover by tender offer in German business.
Under fire from German politicians, Krupp was forced into an early peace with Thyssen and achieved far less than Cromme hoped. It wanted to create a big steel company in the Ruhr, under Cromme’s control. Now the joint venture will be headed by Thyssen as the larger and more profitable of the two companies and Vogel will take the lead.
Advisers like Goldman, which have no political role in German business and no supervisory board seats, might have to consider more carefully in future whether the local expertise offered by partners like Deutsche or Dresdner outweighs the disadvantages, particularly the extreme public sensitivity to the banks’ role in deals that involve job losses or other unpopular changes. Having brought in the big German banks to give the deal the blessing of the German financial community, Goldman found their involvement only galvanized opposition to it.
And while banks such as Deutsche are keen to support more mergers and acquisitions that make German business more efficient and profitable, few have the courage to say publicly that German business needs more takeover bids like this one. Laura Covill
