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German M&A rules in focus
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November 16, 1999: 10:02 a.m. ET
Vodafone's approach to Mannesmann could be the first of many
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LONDON (CNNfn) - Germany's arcane corporate laws came into focus again this week, and analysts said the much publicized spat in the telecom sector, which may become the world's largest contested takeover, could cause a radical change of thinking in Germany.
Vodafone's $107 billion offer for Mannesmann is likely to turn into a hostile bid later this week, throwing the spotlight on the rules governing corporate activity in the world's third-largest economy.
The German press has reacted relatively favorably to Vodafone's approach, hoping that a successful deal will boost Germany's corporate profile. Germany's powerful unions have held their fire on what they think of the potential combination.
Contested takeovers are extremely rare in Germany, and bidders from overseas even more so. Aggressors are likely to run afoul of powerful local labor organizations, as well as restrictive shareholder voting rules aimed at protecting management from unhappy shareholders.
A shareholder must control more than 75 percent of a company's voting rights before it can take management control under German law. Mannesmann's articles of association, which are common in Germany, restrict each shareholder to 5 percent of the votes, no matter how much of the company's capital they own.
"This [Vodafone/Mannesmann] might shake things up," commented Jerry Evans, European strategist at Enskilda Securities. "It's very high profile, and could be make or break for the way people look at Germany."
Merger and acquisition activity in Europe has surged over the past 12 months, driven partly by the switch to a single currency. Still, the vast bulk of the takeover activity has not involved cross-border raids, and that situation is especially true of contested takeovers.
"Europe is a cauldron of restrictive rulings," according Enskilda's Evans, who cites dual-share structures in Switzerland, and tight rules on aggressive takeovers in the Netherlands as two of the most obvious examples. Swiss companies often have two classes of stock: The class with voting rights is usually tightly held by management allies, leaving outside investors to hold non-voting stock.
A classic example of the bias toward finding a "home-grown" solution occurred in the three-way battle among French banks Société Générale (PGLE), Paribas and BNP (PBNP) earlier this year. The French government, through the Bank of France, made it abundantly clear that the three firms should come to some agreement without jumping into the arms of a white knight bidder from overseas.
The Netherlands' restrictive takeover laws allowed Amsterdam-listed fashion house Gucci to fight off the unwelcome embrace of France's LVMH (PMC) earlier this year, even though the French firm owned a significant majority of Gucci's shares.
Vodafone has indicated it plans to get round Mannesmann's legal protections. Chief Executive Chris Gent told Reuters Tuesday that he did not expect Mannesmann's CEO Klaus Esser to hide behind the company's statutes, although Gent noted that Mannesmann's 5 percent ruling expires anyway on June 1, 2000.
Should Vodafone break the mold and succeed with a hostile bid, it is unlikely to open the floodgates, but experts say it would be a good thing for the German stock market.
"More international capital will definitely flow into Germany," according to Jerry Evans of Enskilda.
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