Executive summary
The takeover of the German engineering and telecommunications multinational, Mannesmann AG, by the British-based Vodafone Air-touch Plc in 2000 was a grievous shock in Germany’s corporate culture. This was the first time in Germany’s corporate history to have a successful hostile foreign takeover bid made in the open market; indeed, the takeover amounting to $195 billion (equivalent to DM390 billion) was the largest merger and takeover in the world. Vodafone succeeded in utilizing the increasing influence of it’s stock market capitalization’ to take control of Mannesmann, which by that time had a workforce of 114,000 and a turnover of DM40 billion.
Moreover, the newer and smaller Vodafone which had 12,600 employees, DM11 billion of turnover and was only fifteen years old dealt a crushing blow to German industrial pride. Due to this reversal of fortunes, German corporations came under insistent pressure to move on from their consensual stakeholder model of governance and control to the equity market based Anglo-American model which pursued high share price valuations as the major source of leverage in global expansion and consolidation. Primarily, the German corporate governance system is derived from its social market economy which emphasizes consensus in decision making and partnership between capital and labour.
In Germany, the system is two-tiered with the existence of two boards, management and supervisory; the management board makes the executive decisions with significant input and influence from the supervisory board. The law demands that the supervisory board must have employee representatives. Normally, employee groups have 50% representation on the supervisory board. The supervisory board also acts as the representative of the shareholder body.
Introduction
Many companies have tried to treat corporate governance and its extension, corporate social responsibility, as exercises in public relations. Basically, many companies still go through the process of reporting against the Combined Code without testing their results at all levels of their organization. Failure to take the Code as a thorough health checkup means that company directors are never sure how sound the internal workings of their company are. Instead of using public relations to whitewash their corporate governance, boards should concentrate on ensuring that their governance is sound at all levels in the company, as well as involving their stakeholders in company events like annual general meetings which offer the opportunity of creating an open day atmosphere and allowing stakeholders to share the event.
Companies have tried to take their corporate governance into the public arena through corporate social responsibility (CSR) activities. This appears as an efficient means through which corporate governance benefits to communities may be enhanced; indeed, CSR would “be very effective if it is linked to corporate governance objectives, whereby it is for the long-term benefit of the company not just for charity and short-term publicity” (Davies, 2006, p. 32). Primarily, the future progress of corporate governance depends crucially on the ability to engage the commitment of people in all parts of the organization and among its stakeholders to making a practical reality. Currently, most corporate governance is symbolic and systemic – it has engaged some minds but very few hearts; individuals need to be involved and be free to express their views, and where necessary, report all misconduct so that the integrity of governance can be reported (Davies, 2006, p. 32).
Reasons behind Vodafone’s takeover success
Germany has managed to be at the level of developed global economies due to its elaborate and sustainable corporate governance strategies, more so enhanced by its unique corporate model. However, the last years of the 20th century saw the model beginning to experience substantial challenges in relation to becoming accustomed to market-oriented structures, mainly resulting from the fact that German financial industry is conventionally controlled by the relatively subsistence of large and multinational banks that are greatly betrothed in “cross-shareholding and debt-financing of corporations” (Clarke, 2007, p. 414).
The last decade of the 20th century witnessed a deliberate urge by the banks “to become global investment houses initiating a fundamental dynamic of change in the relationship between finance capital and corporate industry (Beck, Klobes and Scherrer, 2005, p. 111).
Moreover, according to Jackson (2003, cited in Beck, Klobes and Scherrer, 2005, p. 111), this dynamic is seen “as a pressure to liberalize Deutschland AG’s corporate governance institutions in line with Anglo-American practices to promote greater transparency and shareholder returns.” Another influencing factor was the corporate finance function played by the capital markets and the belief that the US model was stronger and more supreme than the German model; indeed, the hostile manner in which Vodafone took control of Mannesmann can be a clear evidence of the above influences (Clarke, 2007, p. 414).
Previously, it was quite challenging and almost impossible for large organizations to engage in forceful acquisitions due to the limitation of resources; indeed, “no foreign hostile takeover took place despite a relatively low market valuation of potential takeover candidates” (Beck, Klobes and Scherrer, 2005, p. 114). However, Deutschland AG experienced one of the most fruitful hostile takeovers during the turn of the century, with Vodafone forcefully acquiring Mannesmann, a company that was experiencing business recess especially in its steel division.
Before the acquisition, the company had tried to salvage itself by focusing on “new business, first on mechanical engineering and automotive technology, and later, in the mid-1990s, on telecommunication, with astonishing success” (Beck, Klobes and Scherrer, 2005, p. 114). Basically, two factors motivated Vodafone in making bid for Mannesmann: 1) “Mannesmann successful telecommunication business fitted into Vodafone’s global operations (with Vodafone taking over Air-Touch earlier in 1999);” 2) “Vodafone saw its own strategic interests threatened by Mannesmann’s plan in Britain” (Beck, Klobes and Scherrer, 2005, p. 114).
The take over proved to be a watershed in this sense of disquiet towards the apparently irresistible advance of the market system; indeed, the loss of Mannesmann was a great psychological blow to the German industrial psyche. Consequently, at least one approach in Germany is developing a novel hybrid model of governance characterized by the institutionalized participation of labour within an increasingly open capital market (Clarke, 2007, p. 414). Therefore, there was a great influence from the Anglo-American institutional investors in the Vodafone’s takeover success.
Germany mergers and takeovers
According to Wubben (2007, p. 8), Mergers and acquisitions relate to changes in the economic control of an entity, but differ with regard to the retention of the legal existence of the target company.” Basically, a merger takes place where two enterprises/companies consolidate their assets and operations to form a new entity or further the operations of one existing firm. Consequently, there occurs a consolidation of shares, with shareholders of the two unifying companies getting into the register of the new company. Basically, voting takes place before the decision to merge is approved, and the same will only become legally binding where majority affirmative vote is recorded.
Acquisition on the other hand involves one dominant company taking control of another company’s assets without having to go through the process of liquidation. In this case, both the acquired and the parent companies will continue to operate as separate entities, with independent formal structures. Basically, the essence of this kind of business formation is to ensure that the value chain, more so in regards to customer-seller relationship, is not broken; however various benefits accrue, primarily in terms of economies of scale and diversification of risks.
In Germany, conglomerate dealings, which involved firms from different industries, were extremely “popular in the late 1980s, but they have diminished in importance in the 1990s as companies have tended increasingly to shift their focus back on their core business to cope with intensifying international competition” (Wubben, 2007, p. 9). Indeed, they have reverted to concentric transactions which involve forming alliances or acquisitions with firms that are in the same market, either in relation to the products produced or the technology that is in use.
Conventional perceptions on competitive edge, more so in relation to the ‘resource-based view (RBV)’ have visualized firms as autonomous units. Consequently, these perspectives have provided only a partial account of competitive advantage in view of the recent growth and significance of inter-firm alliances.
Ineffective defensive tactics of Mannesmann
Before the takeover of Mannesmann, vulnerabilities were emerging within the company. Mannesmann was already breaching its trust with its employees as it continued to promote the telecommunications division at the expense of its industrial divisions in the last decade of the company’s life. There was lack of unity, and compared to other German companies, lower employee loyalty as Mannesmann’s focus shifted from the industrial divisions and its unconvincing strategy on the strategic reorganization of the increasingly diverging businesses of Mannesmann.
Secondly, Mannesmann management’s main defensive strategy during the takeover was singularly ill- conceived when it had a fragmented ownership structure and did not have majority support from non-management quarters” (Clarke, 2007, p. 413). Furthermore, Clarke (2007, p. 413) claims that using an undependable associate such as Vivendi to fend off a hard adversary like Vodafone basically made things shoddier for Mannesmann. Why Mannesmann management suddenly capitulated remained a mystery. It is possible Mannesmann was determined to become a focused telecommunications company, in which case the Vodafone takeover simply accelerated the process.
Before the Mannesmann takeover, German companies in the 1990s acquired a series of British finance houses such as Morgan Grenfell and Kleinwort Benson, and engineering companies such as Rolls-Royce Motors and Rover Cars, and the political response to the Vodafone takeover was constrained by this precedent. Some Mannesmann’s problems were unique such as its fragmented and international ownership, which indicates a slow subjection to Anglo-American ownership and governance structures, preceding the shock of the takeover. The reaction of domestic institutional investors highlighted the willingness of at least one sector of German society to move towards a corporate culture where shareholder value is supreme (Clarke, 2007, p. 413).
Future viability of the German model of corporate governance
Headship from one individual is acknowledged by that person and hard to maintain. Management requires to be simulated all over an association to be efficient and requires to be acknowledged by the association, not one person. In relation to leadership, some of the industries in which the Germans were competitively strong, and which have historically been considered stable technology have been transformed by the Japanese, who have leveraged their flexibility at the enterprise level as a basis for continuous innovation” (O’Sullivan, 2000, p. 268).
Moreover, “German enterprises, have in the post-war period attained considerable success in organizing the hierarchical integration of technical skills; however, two keys “features of the German system that facilitated hierarchical integration – specialized skills among production workers and functional divisions within the managerial organization – impeded cross functional integration” (O’Sullivan, 2000, p. 269). The weakness of the German system of organizational integration in facilitating cooperation across functions seems to be rendering them vulnerable to international competition.
The problems with the German system are apparent in the development of new products. There continues to be debate about the extent of the current problems with German work organization as the foundation for producing superior quality, lower price goods; nevertheless, there are countervailing strengths of that system that have the ability to provide the necessary assistance to the firms to embrace the unique German production model. If this transition is to occur, there is need for a widespread commitment among employers, workers, and unions in Germany to overcome existing organizational barriers to continuous innovation (O’Sullivan, 2000, p. 269).
Employment continues to decline in Germany industries and agriculture. The strengths within manufacturing remain firmly based in chemicals, electrical and mechanical engineering. Capital markets and corporate governance in dominant enterprises, as well as anti-trust policy affect economic performance; moreover, Germany displays low flexibility in terms of the market for corporate control, but higher industrial growth relative to the United Kingdom (Eur, 2002, p. 262).
Parallels between the use of inflated share prices in the late 1990s as an instrument of acquisition, with the use of low interest debt in the 2000s to achieve the same objective by private equity and hedge funds
“Market price dynamics can be affected by the strategies implemented by hedge funds” and other institutional investors in two ways (Eichengreen, et al, 1998, p. 1994). The policies can play the role of steadying prices or potentially destabilize them. In addition, various institutional practices may inadvertently distort prices. However, due to their ability to execute short positions and add leverage in the 1960s and 1970s, hedge funds “traded by holding long and short positions simultaneously, and providing benefits for investors in the volatile markets.
The situation has however changed in the current markets where the incidence of contrarian trading strategies is difficult to gauge, although there is circumstantial evidence that a number of funds are yet to completely transform. There have also been connections between the use of inflated share prices in the late 1990s as an instrument of acquisition, with the use of low interest debt in the 2000s to achieve the same objective by private equity and hedge funds. Moreover, “there is ample anecdotal evidence that hedge funds attempt to search for markets in which prices have overshot their equilibrium values” (Eichengreen, et al, 1998, p. 1994).
According to Beck, Klobes and Scherrer (2005, p. 116), “hostile takeover of Mannesmann by Vodafone marked only the beginning of a new at-arms-length relationship between banks and industry and not the end of it. In fact, there is still a relatively high degree of mutual stake-holding in Germany’s 30 largest companies.” In addition, the private large financial institutions have basically dominated the contemporary financial market, and in the process dethroned the lesser banks that cannot effectively compete with them.
Conclusion
It should go without saying that all boards should avoid any violation of laws. The most culpable act of boards is to intentionally conspire to defraud investors or other stakeholders, but unintentional violations due to ignorance or lax oversight can be nearly equally troublesome. As many directors have found to their discomfort, severe problems can come from the act of tolerating legal violations within the organization. Ethical behaviour is a product of cultural norms and internal controls, both of which begin in the boardroom.
Directors must establish policies and maintain behaviours that set the ethical climate, and they must be ever vigilant in protecting that climate. An obvious step toward staying out of trouble for a board is to avoid the pitfalls that commonly lead to poor board performance. At the least, a board that comprise strong, effective members and which is well organized to carry out its duties should effectively represent its shareholders (Colley, 2003, p. 192).
Along with integrity, the other members of the board also must demonstrate unquestioned competence. The candidate for the board must have absolute confidence in the judgment and experience of each director. If an aspirant director does not respect the competence of the directors and is not confident that they are capable of fulfilling their responsibilities, he or she should decline the opportunity to join the board.
Reference List
- Beck, S., Klobes, F. and Scherrer, C., 2005. Surviving globalization? Perspectives for the German economic model. NY, Springer. Web.
- Clarke, T., 2007. International corporate governance: a comparative approach. NJ, Routledge. Web.
- Colley, J. L., 2003. Corporate governance. NY, McGraw-Hill Professional. Web.
- Davies, A., 2006. Best practice in corporate governance: building reputation and sustainable success. London, Gower Publishing, Ltd. Web.
- Eichengreen, B. J., et al. 1998. Hedge funds and financial market dynamics. NY, International Monetary Fund. Web.
- Eur. 2002. Western Europe 2003. London, Routledge. Web.
- O’Sullivan, M., 2000. Contests for corporate control: corporate governance and economic performance in the United States and Germany. Oxford, Oxford University Press. Web.
- Wübben, B., 2007. German Mergers and Acquisitions in the USA: Transaction Management and Success. NJ, Springer. Web.