Sure enough, on Sunday, Nov. 14, Mannesmann received a “friendly” 103 billion euro offer from Vodafone. No sale, countered Esser when they met that day; we’re worth twice that. The two men parted, to spend the week feverishly canvassing their shareholders and campaigning in the press and in detailed conference calls with analysts. Esser went to court to block Vodafone from using Goldman, Sachs as an adviser, accusing the investment bank of a conflict of interest because of some earlier work it had done for Mannesmann. But a London High Court judge slapped him down, calling “the placing of this evidence before the court… totally disgraceful and unacceptable conduct.” On Friday Gent sweetened his offer to 121 billion euro in stock, but the document arrived too late for the supervisory board to make a ruling. Never mind. Esser still rejects it for not matching the potential value for Mannesmann, and has rendered it a hostile bid. So now Gent is going to take it straight to Mannesmann shareholders.
OK, you knew that cozy European business practices were fading fast. But this fast? Even two years ago you’d have been laughed out of town if you suggested that a 109-year-old German company, darling of the Frankfurt stock market, could be vulnerable to a 14-year-old raider from across the Channel. Yet the first nasty cross-border takeover in Europe will cap a year in which much of the Continent’s juiciest gossip could be found on the business pages. Two French billionaires battled over a handbag designer and ended up suing each other for defamation. A friendly bank merger in Paris morphed into a three-way battle that consumed financial circles for five months. Shareholders in Italy’s formerly state-owned telephone company faced a choice between selling out to giant Deutsche Telekom and local upstart Olivetti, which had made a hostile bid for Telecom Italia. They chose Olivetti–but were soon so furious with its CEO over his restructuring plans that the new Olivetti-TI combination was looking like a target. Friends became enemies, enemies turned ruthless and a whole bunch of investment bankers will get year-end bonuses with two commas.
What’s come over these people? Actually, it’s quite simple. Europe is in play. As advertised, the launch of the euro has created a huge single capital market that’s eager to fund even the most audacious plans. What nobody fully anticipated was how aggressively Europe’s CEOs would respond to life in a financial free-fire zone. Suddenly, cautious executives are boning up on defense tactics, nervous ones are hiring advisers and everyone’s rereading “Barbarians at the Gate” with a sharp eye on his share price. U.S. investment banks are shipping some of their hottest shots to Europe, and buyout firms are piling in to snap up the spinoffs as companies try to get fighting trim. Lawyers, accountants, proxy-statement specialists–the whole takeover food chain is moving in. No wonder: Europe’s M&A volume surpassed that of the United States in the third quarter, and could finish the year above 1 trillion euro.
Thanks to a business culture where social status is deeply linked to one’s job, M&A European style tends to turn hostile pretty quickly as CEOs battle to defend their reputations. CEOs under fire make grueling three-city-a-day roadshows to lobby investors. But that just drives prices higher, making shareholders richer and setting up the loser for a very public fall. Hostile, after all, simply means hostile to the management, not to shareholders and perhaps not even to employees. One measure of improvement: France’s bank battle took five months; the oil fight lasted only 10 weeks.
Esser’s predicament perfectly captures the new mood. One minute he’s carefully building a Europe-wide telecom company out of a onetime steel-pipe maker, aiming to squeeze out more shareholder value by listing the two halves of the company separately. The next minute wolves are circling and he could lose a job he’s held for only six months. The first sign of trouble was when he paid a hefty 32 billion euro for U.K. mobile operator Orange, right in Vodafone’s backyard, even though he and Vodafone were cellular partners in Germany, France and Italy. First strike? Or a defensive play to ward off a bid he feared even then? (If Vodafone snares Mannesmann, it will have to ditch Orange.) “He put that company in play as soon as he separated telecoms from the steel business,” says one European CEO with a smirk. It’s a Schadenfreude moment. One Frankfurt investment banker says that fund managers are irked at Esser because last spring he squeezed every last basis point out of a bond issue that helped him buy Italian mobile operator Infostrada. “Mannesmann has alienated investors,” he says.
And the story is far from over. Stocks go down; predators can become prey. Watch out, Mr. Gent. A white knight could swoop in to save Mannesmann, or, in theory, hook up with Esser or even a third party and go after Vodafone, even though Esser says he is not looking for one. It ain’t cheap, but that doesn’t seem to be a problem anymore. Ron Sommer, CEO of Deutsche Telekom, completely rules out a white-knight rescue of Mannesmann, its cellular rival up the Rhine, because the German cartel office still doesn’t weigh monopolies with Europe as the market of reference. But America’s SBC Communications, Bell Atlantic, AT&T and even America Online have made no secret of their hopes to be bigger players in Europe.
What a fantastic test case for Germany Inc. Thanks to a consensus mentality bolstered by cross-shareholdings and a web of supervisory board seats, no classically hostile takeover has yet made it to the market. Mannesmann’s supervisory board, which includes shareholder-value icon Jurgen Schrempp of DaimlerChrysler and Henning Schulte-Noelle, head of acquisition-hungry insurer Allianz, will vote on the bid Nov. 28. The board also includes worker representatives who fear job cuts and have vowed to fight. German law doesn’t allow a new owner–even one with a 95 percent stake–to force a change on minority shareholders, who can tie up a deal in the courts for years. On Friday Chancellor Gerhard Schroder spoke out against “such adventures.”
All this may look like spontaneous combustion, but the kindling was laid in the mid-’90s. Global competition and deregulation at home forced Old World companies to get lean and focused. At the same time foreign investors with their return-on-equity mentality poured into the stock markets and spread the shareholder-value gospel. “Two years ago shareholders in France and Germany asked vague questions,” says TotalFina CEO Thierry Desmarest. “Now they are very professional.”
Fueling the frenzy are the advantages that can come from making the first strike. LVMH CEO Bernard Arnault is convinced that’s true. He started collecting companies well before his bid for Gucci drove the Italian company into the arms of PPR, a company controlled by his cross-town nemesis, fellow French tycoon Francois Pinault. Pinault wants to build a competing luxury colossus around what is now called the Gucci Group. “There aren’t that many gems left,” sniffs Arnault. “We are the only global player in the luxury market.” Desmarest also thinks the first-strike advantage helped him win his 10-week battle for Elf Aquitaine last summer. “If you are first, you set the agenda, and a counteroffer seems less credible,” he says, carefully refraining from gloating in his Paris office, with a view of the Elf building just blocks away. Adds Ulrich Hartmann, CEO of utility giant VEBA, who kicked off a round of consolidation by agreeing in September to buy Munich-based Viag: “We could choose our ideal partner.”
The psychological toll on the players can be significant. Americans get bruised in takeovers too, of course. But European business people, for all their talk about shareholder value, still seem to take being deposed a little harder. Take Philippe Jaffre, former CEO of Elf. Thanks to his defense, which forced Desmarest to increase his bid, Elf shareholders earned a 26 percent premium, or about >10 billion over the original share price. Michael Zaoui, head of European M&A at Morgan Stanley Dean Witter, who advised Jaffre, says he got more calls of congratulations from shareholders than on nearly any deal he’s ever done. “In the U.S., I would be a winner,” says Jaffre, chain-smoking in a still-unmarked office off the Champs-Elysees where he has parked himself until a good offer comes along. “In France, I am a loser.”
He gently jokes about all his free time, but don’t pity the poor millionaire. He’s pocketed a bundle in stock options, enough to spark a proposal to tax them that was labeled the Jaffre amendment. And the new climate will also make it easier to bounce back. Financial investors snapping up spinoffs or structuring leveraged buyouts are going to need seasoned managers for their new projects. For example, Andre Levy-Lang, CEO of Banque Paribas, tried to merge with Societe Generale until Banque Nationale de Paris went after both. Levy-Lang left Paribas when his shareholders sided with BNP. Speaking from his mobile phone as he rushed between meetings, Levy-Lang says he is talking to potential partners for setting up e-commerce businesses. “I’m an independent person, and I plan to stay that way,” he says.
Because the takeover game is still so new, the authorities are making up some of the rules as they go along. In France, for example, when Elf launched its Pac-Man defense, a relic of America in the ’80s, the French stock exchange decided to let shareholders vote for the TotalFina bid, and then for the Elf counterbid only if that failed, instead of deciding between two options at once. “It’s like fighting a disease; the body has to naturally build up its defenses,” says Jaffre. Companies need to have permission from shareholders to raise capital, otherwise they can’t react quickly without having to call a shareholders’ meeting first. That’s one reason Jaffre was caught out. Desmarest had a preapproved war chest. Hmm. First on the agenda for millennium board meetings?
And because selling out is not business as usual, business can get personal really fast. Take the handbag wars. Even today, the combatants are poking refined jibes at one another. “A white knight can turn into a black knight,” warns Arnault. “[Arnault] wants a monopoly, but that’s an old-fashioned way of thinking,” counters Serge Weinberg, CEO of PPR, on the evening that Gucci announced it had taken over Yves Saint Laurent from Pinault. “This is only the first step. We still have $2 billion to spend.”
Takeover artists are also learning the hard way that shareholders can turn on you in a Wall Street second. Olivetti chairman Roberto Colaninno looked like a hero when he took on Telecom Italia last spring. But now that he wants to transfer TI’s 60 percent stake in its highly profitable mobile operations to Tecnost, the debt-ridden unit Olivetti used to buy Telecom Italia, shareholders are crying foul. Telecom Italia’s share price has plunged below the level of Deutsche Telekom’s friendly offer, and threatens to put the company in play again. Ron Sommer coyly refuses to feed speculation that he is still interested in Telecom Italia. “Let me say, if you want to be a global telecom-service provider, Italy is a beautiful and important market,” he says over coffee in his Bonn headquarters.
Indeed, friends can be just as fickle. Just look at Le Divorce between France Telecom and Deutsche Telekom, whose Global One services venture is on its last legs. The last straw was when Sommer moved on Telecom Italia last spring. Insiders say that the relationship had been steadily deteriorating as Sommer chafed at France Telecom’s reluctance to move into the U.S. market together more aggressively, say by launching a joint bid for Sprint before it was snapped up by MCI WorldCom last month. FT chairman Michel Bon declined to be interviewed for this story. Sommer says carefully: “I think it’s starting to be a competitive relationship.” No kidding. Last month Bon bought a 77 percent stake in German mobile operator E-Plus. Last week Sommer bought Siris, a telecom company in Paris.
There are still plenty of obstacles to true cross-border consolidation. Europe is still a bunch of countries, after all. There is no single takeover code, stock exchange or body of corporate law. Gucci was able to outmaneuver LVMH’s bid and quickly bring in Pinault as a white knight because it was registered in the Netherlands, which doesn’t require shareholder approval to raise new capital. There is no such thing as a European company, and little hope that governments can agree on tax, accounting and labor rules, which would have to come first. “The politicians are not yet ready for the changing times,” notes VEBA’s Hartmann.
Still, there is no going back. Especially with a new generation of leaders at or near the helm. “I know that if I don’t perform, I’ll be fired,” says PPR’s Weinberg, 48. “That’s the game.” Learning the rules doesn’t always make a game more fun, though. Just ask Klaus Esser.
