Schaeffler takeover rocks corporate Germany

The story of the summer has been family-owned Schaeffler's takeover bid of Continental. Neil Sen has a look at what happened and what it means for the company

"You can't get along in this world by being nice to everyone," Maria-Elisabeth Schaeffler, the head of the private, family-owned German engineering group Schaeffler, said in 2001 after her company's successful hostile bid for the much larger, listed company FAG Kugelfischer.

This summer Frau Schaeffler, who is 66, proved again she was not in the business of being "nice" when she launched another unsolicited bid for a far bigger listed company, the German automotive parts manufacturer Continental, and this time used controversial "creeping" tactics to boot.

Hostile bids are rare in any market, but in Germany's conservative business culture they are almost unpardonable. Yet, extraordinarily, as the dust settles Schaeffler, which manufactures ball bearings at its base near Nuremburg, looks set to take control of Continental in due course without causing much of a scene, without prompting any special regulatory scrutiny, and without bringing down the pillars of Germany's corporate edifice. And the deal will propel the Schaefflers into the front rank of German business families.

Any move on Conti, as it is known, would have looked bold on paper. The annual revenues of the second biggest tyre maker in Europe amount to €26 billion, compared to Schaeffler's €9 billion. But the way Schaeffler chose to go about it provoked the ire of both Conti and various shareholder groups, leading to the withdrawal of Deutsche Bank which had been lined up as advisor and financial backer.

In a manner reminiscent of Porsche's pursuit of Volkswagen, it discreetly and cheaply built up a stake of 36% by mid-July, largely through swap transactions which did not have to be disclosed and which were alleged by Manfred Wennemer, Conti's chief executive, to be "illegal". He described the transactions as "sneaky" moves that had been carried out "egoistically, high-handedly and irresponsibly".

Schaeffler then launched a bid, at the minimum price allowed under German regulations, for the whole company, valuing Conti at €23 billion. Under German law, a shareholder owning more than 31% of a company must make an offer for the remainder of the shares.

Yet, provocative as these tactics were, Schaeffler was careful to balance them with emollience, as it did during its takeover of Fag Kugelfischer. It said that its "strategic shareholding" did not have to be a majority one, that Conti would not be broken up, that it wanted to work with the existing management, and that "no jobs will be lost in conjunction with the transaction".

It knew all along that it held a strong card: as a stable, family-owned company it looked attractive to certain important figures in the Conti camp. Robert Bosch, Conti's bigger German competitor, is after all family-owned, and Germans in general are comfortable with family-run companies.

Schaeffler is cash-rich: estimates in Germany suggest it has made annual profits averaging €1 billion in the last seven years. Meanwhile, Conti was suffering from shrinking markets, especially in the US. It was also encumbered with €10 billion of debt as a result of an improvident €11 billion acquisition of electronics specialist VDO in 2007, which was made just before the credit crunch, and its share price had fallen by 50% since the deal. Schaeffler timed its attack well, coming as it did at a time of serious vulnerability for Conti.

What is more, Schaeffler had a shrewd idea of what the other side was looking for. While the management board spurned the family-owned company's advances, the supervisory board was keen to talk. This was no doubt because the latter's chairman is Hubertus von Grunberg, a former advisor to Schaeffler who knows the company and the family well.

According to German investment bankers, von Grunberg, like many other senior German executives, was keen to have a family company as an "anchor investor" which would take a large stake and build a lasting relationship. Other members of the supervisory board, half of whom are employee representatives, felt the same.

What had appeared only a few weeks ago to be aggressive Anglo-Saxon M&A, by a company that had already gained a reputation for tough management and abrasive tactics, has quickly transmuted into traditional German consensus building. "This is no corporate revolution," commented one senior investment banker who has worked on German deals.

Schaeffler, which said on 2 September it had gained control of 48% of Conti, promised not to take a stake of more than 49.9% until 2011, although it already has de facto control since many shareholders do not exercise their voting rights. It also agreed to maintain Conti's stock market listing. Lest there be any residual fears of job losses, former chancellor Gerhard Schroeder is acting as "guarantor for securing the interests of all stakeholders of Continental."

Fears about further takeovers by stealth, voiced by certain shareholder groups such as Schutzgemeinschaft der Kapitalanleger (SdK), do not seem to be shared by the regulators. They appear happy with a new law that gives the state the authority to investigate acquisitions of stakes of more than 25% by entities based outside the European Union or the European Economic Area.

The deal represents a triumph for the family-owned business model, a model that is becoming highly fashionable in the present economic climate. Warren Buffet recently toured Europe in search of family-owned companies in which to invest.

He lauded them for their "long-term approach in terms of their planning and their strategy." He urged German companies in particular "to think of Berkshire Hathaway" when they "feel the need to monetise their assets."

It is also a triumph for the Schaeffler family itself, which founded the business in 1946. Frau Schaeffler, who took over the business in 1996 when her husband Georg, a co-founder, died in 1996, has overseen a spectacular, four-fold growth in revenue at the group since 1998 when she hired Jurgen Geissinger as president and chief executive.

The hostile bid in 2001 notwithstanding, the family had kept a low profile until the battle with Conti, although Forbes magazine ranked Frau Schaeffler and her son Georg 104th in its list of the world's billionaires in 2008 with a net worth of $8.5 billion, making them the seventh richest Germans in the list. After their latest deal, they will not be too concerned that they had slipped 26 places in the world rankings since 2007. But don't expect them to be nice to everyone now they are famous.