US hedge funds and other activist investors are roiling Germany’s corporate landscape in unprecedented ways. Seeking new fields to conquer after exploiting the best opportunities at home, they have overcome a steep learning curve to master Germany’s sometimes arcane practices.
They have, for instance, figured out what co-determination of labor and capital on company boards is and learned to take it seriously. But they have also discovered that minority shareholders have more leverage in German companies, giving them an opportunity to pressure management to make changes.
ThyssenKrupp chief Heinrich Hiesinger has learned at his cost what kind of pressure they can bring as first Cevian, a Swedish firm backed by Carl Icahn, and now Paul Singer’s Elliott Management have pressured him to extract more value from the spin off of Thyssen’s steel division.
The activist pressure, in fact, has led to a boom in mergers and acquisitions, as these investors prefer “pure plays” – companies focused on a core activity – to conglomerates. They push management to divest marginal activities, acquire other companies to strengthen the core, and become a leader in that industry.
This has transformed entire sectors in Germany. The recent exchanges between BASF and Bayer as the latter acquired Monsanto has given both firms a stronger focus on core businesses. Likewise, the round robin among energy utilities RWE and E.ON has rationalized and separated the fossil fuel power generation, renewable energy, and retail distribution functions formerly bundled into conglomerates.
As a result, M&A volume in Germany in the first half reached a new record of €187 billion ($217 billion), topping the previous boom year of 2007 and the €164 billion made in the first half of that year. Macquarie’s European head, Rainer Langel, expects the second half of this year to be even better.
Hedge funds no longer shy away from even the biggest targets in Germany. “Experience shows that established activist funds are primarily looking for larger companies,” said Birger Berendes, who heads up German M&A at Bank of America Merrill Lynch, “since their strategies require liquidity in the shares in order to build up a substantial position and later not to be trapped.”
Siemens’ chief of finance, Ralf Thomas, has no illusions that the sprawling Munich conglomerate will be spared. “I’m quite certain that there are activists busy looking into the case of Siemens,” he said at the Handelsblatt CFO conference.
These investors are even less shy about telling CEOs it’s time to go. A recent survey by “Activist Insight” newsletter found that 52 percent of those surveyed thought ThyssenKrupp’s Mr. Hiesinger would be the next to be pushed out of office. US investors, including Elliott, are among those pressuring GEA CEO Jürg Oleas to make an early exit so that his replacement can make the sweeping changes they are seeking in the conglomerate.
Campaigning for change
Activist investors have money and are eager to spend it around the globe. With $158 billion in their war chest, last year they launched 60 campaigns worldwide for corporate change. They ganged up on Belgium’s Akzo Nobel, for instance, forcing it to split up. In Germany, Petrus Advisers is pressuring Commerzbank’s online bank, Comdirect, for changes, and Active Ownership Capital is campaigning against the diversified engineering group Schaltbau as well as drug giant Stada.
“Activists catalyze and communicate the dissatisfaction of shareholders,” said Goldman Sachs partner Alexander Mayer. “This will fuel M&A and other portfolio activities.”
Financing mega-acquisitions like Monsanto is easy, despite rising interest rates in the US. Bayer easily raised $15 billion through bond sales for its takeover of Monsanto, and another €5 billion with bonds denominated in that currency. It all fills the coffers of the investment banks. In the first half alone, banks earned $1.3 billion in commissions on M&A and bond and stock underwriting as well as credits.
Peter Köhler is a Handelsblatt editor in Frankfurt, reporting on banks, private equity firms, venture capital and corporate funding. Robert Landgraf is deputy finance editor. Christian Schnell covers markets and industry. Darrell Delamaide adapted this article into English for Handelsblatt Global. To contact the authors: firstname.lastname@example.org, email@example.com and firstname.lastname@example.org.