In the wake of Vodafone's hostile takeover of Mannesmann, Germany's traditionally quiet M&A market looks set to become increasingly active. Dominic Egan investigates.
A deal as big as Vodafone-Mannesmann would have caused ripples anywhere. But, in a pond as quiet as the German M&A market, it has been making major waves.
Since the end of World War Two, German companies have enjoyed an enviable level of security and stability. Stephen Denyer, Allen & Overy's managing partner for continental Europe, says: “The large German companies have tended to be permanent features in a way that large companies in the UK have not been since the 1950s and 1960s.”
The main reason there has been so little change is that companies have not been under any great pressure to perform.
This is in part due to the influence of the German banks, which own large percentages of many of the leading companies. Rather than wheel and deal, the banks have preferred to take what they describe as a long-term view and hang on to holdings. However, a substantial consideration in the banks' policy has been that, having created a series of complex cross-shareholdings, they would have been liable to massive amounts of tax had they divested themselves of the shares.
Reforms aimed at opening up the market by alleviating the banks' tax position are now on their way.
Graham Ward, the managing partner of Ashurst Morris Crisp's Frankfurt office, says: “The banks are under quite some pressure to maximise returns on their capital. They can't do that by sitting on stakes – very valuable stakes – in German companies which yield much less for them than other lines of business.
“That puts pressure on them to try and realise these shareholdings and to some extent unwind them.”
Another major factor militating against a more active M&A market has been the absence of a mandatory takeover code and, in particular, the lack of squeeze-out provisions empowering a purchaser to acquire minority interests.
“The legal structure in the UK makes taking over a company in the UK a relatively straightforward proposition,” says Denyer. “In Germany, it has historically been difficult to take over a company that didn't want to be taken over. As a result, Germany has seen exceptionally low levels of takeover activity.”
Daniela Weber-Rey, head of corporate at Clifford Chance Punder, says: “I think we're next to the only country not to have squeeze-out provisions. German law has been a little slow to catch up to the global world that is driven by the Anglo-American legal system.
“There was a time when people felt there was no need for a takeover code in Germany. You have to remember that the takeover code is also about minority protection. We have a lot of protection in our corporate code. It's a different approach. It's corporate law, not capital markets law.”
Weber-Rey believes that Germany has little choice but to follow the lead of countries such as Austria and Switzerland, which have recently adopted mandatory takeover codes. “Germany has to catch up,” she says. “We are a financial centre in close contact with London and New York and we need to have a takeover code to show that we are a mature capital markets country.”
When that will happen is still anyone's guess. The German finance and justice ministries are working on a draft, which is due to be published in May. A consultation process will then begin.
Given the obstacles that had to be overcome, it is perhaps something of a miracle that the Vodafone-Mannesmann deal got off the ground. However, the very fact that the deal happened at a time when the tax rules have not yet been changed and there is no mandatory takeover code means there are considerable grounds for optimism on the part of M&A lawyers in Germany. Thanks to the global market, German M&A activity looks set to boom.
Denyer says: “Major multinationals are now willing to take on greater challenges than they would historically in trying to take over companies in Germany because that's the way the global marketplace is pushing.
“It's a reflection of the global business environment. The balance has shifted to such an extent where a major economy such as Germany – in some fast changing and fast growing areas like telecoms – can't stay on the sidelines.”
Ward says: “The days of firms being able to hide behind German barriers are over. You have an international investor base that makes companies subject to the same tests and yardsticks, whether they are located in the US or Germany.
“They're all competing for the same funds. They all have to have a strong share price, a good story to tell that allows them to get better funds. The playing field is levelling and everybody is subject to the same rules.”
Ward foresees the boom eventually spreading beyond the new technology fields. “I think the effects will be widespread, but the focus will be on industries where stock is high because they're easier to buy.
“If you've got a company in the US or in the UK with very highly valued stock, that allows you to have a war chest to go in and buy in Germany. I think you'll see it concentrated on the e-commerce and telecoms sectors – they seem to be the frothiest at the moment. It will probably also happen in the more traditional industries, but not so quickly and not so frequently.”
Denyer does not believe that the market will be transformed overnight. “Things are changing in Germany and they will keep on changing, but that's a steady year-on-year process.
“The Vodafone-Mannesmann thing is a landmark occasion, there's no question about it, but it was one thing in a steady, evolutionary process rather than an overnight revolution.
“It does not mean that next month we're going to see a whole host of hostile takeover battles in Germany. It will be a progressive change. Progressively there will be greater pressure on corporates and corporates will begin to do more things in response to that.”
However, Denyer is confident that a real change in the way German companies operate is under way.
Traditionally, smaller companies have raised finance from banks and, as a result, the Frankfurt stock exchange has listed only a relatively small number of big companies. “In the last few years you've had the second market in Frankfurt, the Neue Markt.
“That means that a lot of smaller companies have been coming to the market and over time that will lead to greater activity, because once those companies are on the market, it will be possible to take them over – and they'll be more digestible than a huge company like Mannesmann.”
Although the German market is opening up, its companies will be no walkover, warns Weber-Rey. “Vodafone-Mannesmann has shown that there are foreign bidders who have the stamina to make such deals happen,” she says. “But it has also shown that German targets have the stamina to stand up against it and drive the market price up a lot and thus act for the benefit of the shareholders.”