Frankfurt. The takeover of Commerzbank by Unicredit caused discontent in Germany for many reasons. One point of criticism is that the Milan-based financial institution secured control with a voluntary takeover offer that did not contain any significant premium on the Commerzbank share price.
These so-called “low ball offers” are trendy. Buyers initially acquire a significant share in a German target company. They then submit a “dumping offer” to get over the 30 percent threshold. They can then flexibly continue to purchase and gradually take control.
In addition to Unicredit, the British trading group Fraser also followed this pattern when it took over Hugo Boss and the Italian media company MediaForEurope (MFE) when it bought Pro Sieben Sat1. The Federal Ministry of Finance (BMF) now wants to react.
It is considering reforming takeover law. “The BMF is currently examining whether an adjustment to the existing takeover law is necessary,” said a spokeswoman for the ministry to the Handelsblatt. “The test is not yet complete.” She did not comment on what possible adjustments might look like.
The topic has been discussed in the financial industry for months. Low-ball offers appear to be becoming more common, says Lukas Poensgen, co-head of Bank of America's M&A business in EMEA. For the management of a target company, this approach is “difficult to defend,” says Poensgen.
Christian Wagner, head of investment banking at Barclays in Germany, Austria and Switzerland, explains: The first share purchase can serve to signal interest in a takeover. In addition, the buyer prevents other interested parties from taking their own action. “The investor can first observe how the share develops and how other market participants react.”
German takeover law stipulates that investors must make a mandatory offer to all other shareholders if they exceed the 30 percent threshold in a company.
If you submit a voluntary takeover offer shortly before crossing this hurdle and thus get over 30 percent, this obligation no longer applies. Such a voluntary takeover offer increases flexibility for the buyer and is often less attractive for the other shareholders than a mandatory offer.
This approach paid off for Unicredit. The institute offered 0.485 of its own shares per Commerzbank share. The offer price was therefore below the Commerzbank price for most of the acceptance period - and was therefore actually unattractive for the shareholders of the Frankfurt financial institution.
Nevertheless, the Italian financial house collected almost 18 percent of all Commerzbank shares. According to the Frankfurt money house, most of these came from banks with which Unicredit had also carried out derivative transactions. However, that does not change the fact that Unicredit will soon control 50 percent of Commerzbank shares after the implementation of the takeover offer - and can therefore set the tone at the next general meeting.
In the case of Hugo Boss, Frasers got 47.9 percent after the offer deadline, even though the board had recommended that its shareholders - just like Commerzbank - reject the offer. MFE was also successful with its approach. The group run by the Berlusconi family has now increased its stake in Pro Sieben Sat 1 to 75.6 percent.
The gradual takeover of control with the help of dumping offers is met with criticism. Unicredit achieved a majority with a financially unattractive offer without paying an appropriate control premium, Commerzbank supervisory board chairman Jens Weidmann complained in the “Süddeutsche Zeitung” in August.
“This raises questions about takeover law in Germany, which the legislature should perhaps take a look at,” demanded the former Bundesbank boss. “In other countries it is more restrictive, such as the USA and Great Britain.”
Hans-Peter Burghof, Professor of Banking and Financial Services at the University of Hohenheim, shares this criticism. “The takeover law is intended to protect shareholders, but in the case of Commerzbank and Unicredit it has the opposite effect,” he says. “It is harmful for the stock and capital market culture when more and more companies change hands without a takeover premium.”
Burghof emphasizes that the shareholders of the buyer and the target company should actually share the synergies that usually exist in a takeover. “In the case of dumping offers, only the buyer’s shareholders benefit.”
A main point of discussion in the debate is the level of the takeover threshold. This threshold also exists in Great Britain, and exceeding it results in a mandatory offer. Unlike in Germany, the three-month average price does not have to be paid as the minimum price; instead, only the highest pre-purchase price is important.
In addition, every additional share purchase between 30 percent and 50 percent triggers a new offer obligation. It is therefore impossible to go over the 30 percent hurdle with a dumping offer and then continue to buy.
“This alone gives bidders clear incentives to ensure a high level of acceptance of the offer beyond the 50 percent threshold, that is, to offer an attractive price with a premium above the current price,” says Tobias Tröger, scientist at the Leibniz Institute for Financial Market Research Safe.
In addition, in Great Britain, in contrast to Germany, there is a specified minimum acceptance threshold of more than 50 percent. If a bidder does not achieve this with his offer, his offer has failed.
Although he can retain his existing stake in the target company, he cannot initially expand it any further. He is not allowed to buy any more shares or make another offer for twelve months. “The threshold acts as a market test because only the offer that a sufficient number of shareholders considers attractive is successful,” explains Tröger.
In the USA, takeover law works structurally differently: there is no mandatory offer. Overall, the focus is less on equal treatment of shareholders than in Germany and Great Britain. This means that an existing control package can be sold to someone else without triggering an obligation to make an offer.
“Transparency is achieved through reporting obligations under capital market law, which apply from a stake of five percent,” explains Tröger. There is no mandatory offer there, “so the question of low balling does not arise in the European form from the outset,” he says.
His research colleague at the Leibniz Institute for Financial Market Research Safe, Bero Gebhard, points out that Germany's leeway is limited because the federal government has to adhere to European guidelines in the event of a possible reform. Regardless of the discussion about the takeover thresholds, he suggests shortening the integration process after a takeover.
A strength of the US model is the two-stage takeover, says Gebhard: the offer is followed by the merger with the buyer. In Germany, on the other hand, group integration takes place over several stages and therefore takes significantly longer.
“It can quickly take five years from the time the investment is built up to the complete integration, which not only puts a strain on the acquirer, but also on the business policy of the target company, whose bodies have to deal with these questions for years,” says Gebhard. Barclays investment banker Wagner sees it similarly. “If there is a need for reform, it would be to simplify the process.”
