Schaeffler AG has formally abandoned its attempt to create a fully merged automotive components group out of its shareholding in Continental.
IHS Automotive perspective | |
Significance | Schaeffler AG, which is the largest investor in Europe's second largest automotive component company Continental AG, has announced that it has terminated its plan to merge the two companies. |
Implications | Schaeffler cemented its hostile takeover of Continental in 2008 and put into place a shareholder's agreement which it said would limit its stake in Continental to 49.99% in an effort resolve a dispute over control of the company, with the long-term strategy to agree a full merger. |
Outlook | It will probably make little material difference to the way the two companies interact and work together moving forward. The Schaeffler family will remain a significant influence over the company but they appear happy to allow a large degree of management autonomy at Continental and allow the firm to follow strategies like its major automated driving strategy. |
Schaeffler has announced that it will officially terminate its shareholder's agreement with Continental in May 2014 and has therefore abandoned plans for a full merger between the two organisations. According to a company press release, the agreement which was put in place on 20 August 2008 and which was intended to act as a framework for transition to a full merger will be terminated because the "investment agreement no longer has any practical relevance for either company since key provisions of the agreement expired in August 2012. Schaeffler and Continental have benefitted from their excellent and pragmatic cooperation for years and will continue this cooperation in the future."
The agreement was put in place in 2008 when Schaeffler completed its hostile and extremely unwelcome (from the perspective of Continental's then management team) takeover bid. The agreement was brokered with the help of German chancellor Angela Merkel, who acted as a kind of corporate mediator, and who helped put in a place an agreement which would placate Continental's staff and shareholders, while also allowing a structure that would eventually lead to a full merger. Schaeffler agreed to restrict the shareholding it controlled to 49.9%, with the other shares being acquired being parked at German banks. The agreement also laid out the terms of the two companies' co-operation, taking into account Schaeffler's position as Continental's biggest shareholder.
Commenting on the recent strong performance of Continental, Maria-Elisabeth Schaeffler and her son Georg F.W. Schaeffler said, "As Continental AG's major shareholder, we are very pleased with Continental's achievements over the past few years. We consider our investment in Continental a long-term strategic investment aimed at sustainably increasing the value of Continental AG." WContinental CEO Elmar Degenhart said, "Notice of termination of the investment agreement is understandable from the vantage point of Schaeffler, our anchor shareholder. We are confident that the two companies will continue their very good and goal-oriented cooperation on into the future."
Outlook and implications
The original shareholder's agreement was instigated after the initial resistance of Continental's then management team to what was a hostile takeover of Europe's second largest automotive components conglomerate by a much smaller company. The then CEO of Continental Karl-Thomas Neumann resisted the takeover, and despite the establishment of the shareholder's agreement, which was supposed to manage the ownership transition and pave the way for a full merger, Neumann was ousted in a boardroom coup in 2009. Neumann went on to be appointed as CEO of Opel in March this year, while Continental has actually performed reasonably well subsequently under Schaeffler control. However, this has a lot to do with the recovery of the German premium car industry, to which Continental is a significant supplier, and which has seen the OEMs like BMW, Audi and Mercedes-Benz enjoy strong sales as a result of renewed demand for their products in China and the US. During the time of the Schaeffler takeover of Continental both organizations were saddled with significant levels of debt.
Schaeffler's debt grew to EUR12 billion (USD15.6 billion) after the company was faced with more shareholders willing to sell it stock than it initially expected when it made its offer for the company. At one point its indirect and direct holding was 90%, but these excess shares have now been partially sold off (see Germany: 25 September 2012: Schaeffler to Sell 10.4% Stake in Continental to Raise USD2.1 Bil.). For its part Continental incurred around EUR10 billion during an earlier takeover of the VDO automotive components unit of Siemens VDO. During the height of the financial crisis it looked as through the combined debt burden of both companies could lead to the potential for the banks taking control of both firms. But both firms have subsequently enjoyed robust financial results and their liquidity has improved, with Continental's net indebtedness declining to a far more manageable EUR5.3 billion by the end of 2012. Schaeffler for its part has also reduced its debt level to EUR6.8 billion in the same period, so both firms are on a more stable financial footing. Going forward both Schaeffler and Continental will concentrate on continuing to collaborate on about 30 combined projects, while committing to separate ownership and management structures. Continental's management will be able to concentrate on important future technology strategies such as its commitment to automated driving (see Germany: 28 December 2012: Continental to position itself at the forefront of automatic driving technology) and the ending of the uncertainty over the future structure of Schaeffler and Continental can only be a positive for both organisations.