(Bloomberg Opinion) -- Merger arbitrageurs once found it easy to force bidders for German companies to pay a full price for a takeover target. But acquirers are adopting a new playbook to keep meddlesome hedge funds at bay. For the German corporate sector, it’s a pyrrhic victory.
The key battle in German M&A used to be over securing a 75% holding — the level that would guarantee pushing through a shareholder resolution on so-called domination and profit-and-loss-transfer agreements. These are the accords that give the majority shareholder direction over strategy and access to the corporation’s cash flow.
In the low-rate environment that followed the financial crisis, hedge funds realized what a great deal these domination agreements were for shareholders who stayed invested in the acquisitions: Minority stockholders get a minimum dividend and a set buyout price for their shares. Seeking to optimize their exposure to this opportunity, hedge funds would buy into a takeover target but decline to sell their full holdings into the bidder’s initial offer.
This, combined with the rise of passive funds, has made getting a high level of shareholder acceptances for German deals much harder over the last decade. Some bidders have responded by settling for a mid-60% acceptance threshold, which would potentially still give them enough of a holding to pass a shareholder resolution given turnout is always incomplete.
Yet it’s not clear this works. In 2017, private-equity suitors launched two bids for healthcare firm Stada Arzneimittel AG, lowering the acceptance threshold twice and hiking the offer price. They still had to pay a big sweetener to buy off hedge-fund holdout Elliott Management Corp.
Now we appear to be in a new evolutionary phase. Recent German deals have seen bidders foreswear their ambition for a domination agreement, at least for a few years. To add credibility to this commitment, Taiwan’s GlobalWafers Co. cut an initial 65% acceptance hurdle to 50% in its bid for German silicon wafer maker Siltronic AG. After a statement from GlobalWafers that it wouldn’t make a repeat offer if the deal failed, acceptances hit 70%.
Likewise, Vonovia SE removed its acceptance condition entirely in its bid for rival property firm Deutsche Wohnen SE (and has since secured a majority holding). Private-equity suitors Hellman & Friedman and EQT AB, battling over pet supplies retailer Zooplus AG, will settle for 50%.
The message is: Don’t hold us to ransom for full control of this company, that’s not our goal.
It’s hard to believe these bidders wouldn’t prefer greater control, and won’t try to secure it in the future. But hedge funds can’t be sure. Even where the commitment not to go for a domination agreement has a three-year expiry, that’s a long time for an arbitrageur to tie up funds in an uncertain situation. The bet may be that suitors can escape their self-imposed shackles sooner (say, because their commitment was couched as a mere intention).
For ordinary shareholders, the risk is that bids come in lower as buyers aren’t seeking full control from the get-go. That puts more reliance on competing offers to get the price up. Moreover, bidders have another stick to wield once they get to a majority holding — a potential de-listing, making the shares harder to trade.
In deals led by sector peers, failing to get outright control of a target means integration must be conducted at arm’s length and industrial benefits won’t be fully realized. Some bidders may just look outside of Germany.
Or there may be more situations where acquirers settle for positions below 50% using low-ball offers. The suitor then gets quasi-control and can block major moves by management while remaining shareholders don’t get compensated. Unfortunately, there’s no requirement for offers to have a minimum acceptance level that would ensure a bid closed with clarity of who’s in charge.
The hurdles to buying out minorities even when most shareholders have accepted a takeover are so ingrained in the German regime that they’re hard to change. But simple reforms could help un-gum the situation. One might be to give bidders a short window to amend acceptance thresholds once they know the result of their offer, giving the deal a second chance.
Takeovers work best when control passes swiftly, cleanly and at a fair price. Bidders may have cornered hedge funds wanting them to pay up – but at the potential cost of deals getting stuck in limbo.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.
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