The "Locusts" are Coming!
It's an interesting metaphor for private equity buyout companies, no? I didn't make it up; that came from German politicians referring to private equity firms like US-based Blackstone and Cerberus. In the Old Testament, locusts were plague number 8 of the 10 plagues brought on the Egyptians by God in order to force the Pharos to free the Israelites. For you Bible fans, that Exodus 10:1-20.
Things are a bit different these days. While grasshoppers still can destroy crops and bring economic blight to a farming region, the same concept of plagues and locusts can easily be applied to US-style private equity buyout firms. These firms specialize in mass firings, plant closures, cost cutting, outsourcing and in general, doing anything to make a profit regardless of the human cost to such actions. Germany is fiercely defensive of its industrial companies and the German public doesn't take well to plant closures, mass employee firings, layoffs and loss of German control. It just wouldn't be the same if the Chinese controlled Volkswagen or if a Saudi investment group bought Porsche.
The Mercedes-Benz crisis is near to its "final solution" with the pending divorce from American partner Chrysler. The Germans were only too happy to unload its ugly American sister to Cerberus so they can wash the ill-fated DaimlerChrysler chapter of history from the corporate ledgers. The locusts were ok for Chrysler, but definitely not for a German company.
The current "Germany Inc." crisis is the pending sale of Siemens VDO to a friendly suitor or its spin-off in an initial public offering (in Germany). The problem is that the IPO, scheduled for September, looks like it will value VDO below €10 billion while suitors such as TRW Automotive Holdings and Continental AG (the large German auto parts and tire company) have offered €12 billion and €11 billion respectively.
It's of particular interest to the Germans that TRW, while still a public company in the US, is controlled by Blackstone Group, LP. The Germans are very leery of the US-style management that likes to close plants, lay off workers and outsource production to a low-cost country like China.
Siemens VDO was formed when German industrial giant, Siemens AG purchased VDO several years ago. VDO's specialty, in the early days, was precision instrumentation like speedometers, tachometers, fuel gauges, etc. These devices were highly-engineered mechanical devices that have given way to sophisticated electronic devices.
Siemens VDO Automotive is much larger these days. It makes powertrains, chassis, car bodies, interiors, infotainment electronic systems and controls, ABS electronics, airbag sensors & controllers, steering wheel manifolds, sunroof body electronics, electronics, telematics, and driver assistance systems. In its last fiscal year, VDO's sales were $12,012 million and Automotive News ranked it as the 11th largeset OEM (original equipment manufacturer) parts supplier.
This Wednesday, 25 July 25, Siemens agreed to sell Siemens VDO to Continental AG for (Euro) 11.4 billion. It looks like the locusts (TRW) were fended off once again.
Continental AG was no slouch. It ranked 12th on the same list and it had global sales of $11,470 million. Continental, while best known for its tires, makes electronic brakes, stability control management systems, foundation brakes, chassis systems, safety system electronics, electronics, telematics and driver assistance systems.
The German government would like to see a friendly merger of Continental and VDO. You know -- keep it all in the same country with the same economic and social values.
You see, in 2005, Siemens sold its mobile phone handset business to Taiwan's BenQ Corp. In the fall of 2006, BenQ closed the German factories and thousands of Germans lost their jobs. This move is common in the US and is cheered on by the vultures of Wall Street in the name of ever-cheaper products, reduced costs and increased corporate profits. In Germany, where the focus is keeping German jobs in German factories, this move caused major negative political fallout.
As hard as it is for us to believe, Siemens' CEO Peter Löscher has stated that "Siemens will reach a decision that doesn't only rest on price." Wow, it's refreshing to hear a soulless CEO consider factors such as the human toll on these mega corporate mergers. What a change to think that a company had to react to political fallout over the loss of German jobs from its last major divestiture.
I've talked about German nationalistic protective practices in the past. The most public recent move was when Porsche bought control of Volkswagen AG to fend off any non-German "locusts". Today, privately-held Porsche owns around 31% of VW and the German State of Lower Saxony owns just over 20%. Together they control VW.
BMW AG is firmly in the control of the Quandt family and BMW has quietly repurchased enough shares to bring the Quandt's family controling interest from its publicly stated 46% to more than 50% (just my guess).
Daimler paid Cerberus to take Chrysler off its hands. The final divorce is pending. The reconstituted Daimler AG will be traded on the Frankfurt stock exchange. I doubt it will continue its listing on the NYSE as compliance with US SEC rules is quite burdensome. But time will tell that story.
It is interesting to note that Robert Bosch GmbH, the world's largest OEM auto supplier in 2006, is not a public company. It's owned by the family foundations. According to Bosch's website, Robert Bosch Stiftung GmbH, an exclusively charitable foundation, owns 92% of the equity of Bosch (but none of the voting control). The Bosch family holds the remaining 8% of the equity with 7% of the vote. Robert Bosch Industrietreuhand (a family holding company) holds no equity but 93% of the voting rights! The family foundation uses its share dividends exclusively for charitable purposes listed as general medical care, international understanding, social work, training and education. Bosch had worldwide sales of $29,687 million in 2006. You can be sure that Bosch isn't going to be sold out of Germany anytime soon.
It must drive the locusts and vultures in the US capital markets crazy to know that most of the extreme wealth of Bosch is being used for social good.
ThyssenKrupp Automotive AG, number 15 on Automotive News's list, with sales of $10,583 million is a subsidiary of German industrial conglomerate ThyssenKrupp AG. This behemoth, in itself, is the product of the merger to two large German industrial companies. Last year, ThyssenKrupp AG had sales of €46 billion. It's not a takeover target.
Right behind ThyssenKrupp, at number 16 on the list, is another German giant -- ZF Friedrichshafen AG. ZF makes transmissions, steering systems, suspension components, axles, clutches and dampers. Sales in 2006 were €11.7 billion. But did you know that ZF is controlled by two family foundations? Yes, if you dig deep enough in the ZF website and financial statements, you find out that 93.8% is owned by the Zeppelin Foundation of Friedrichshafen Germany and 6.2% by the Dr.-Jürgen-Ulderup Foundation of Lemförde Germany.
It's all just business as usual in Germany where the industrial base is fiercely defended from foreign influences.
German protectionism doesn't stop with ownership issues. Some proposed EU tailpipe emissions regulations are particularly difficult for German performance-luxury auto companies like Mercedes-Benz, BMW, Audi and Porsche. EU regulations with stringent emissions standards are easier to meet for companies that have a much larger small-economy car operations. With the exception of VW, the rest of the German companies are at a competitive disadvantage with the likes of Ford, Toyota, Honda, Renault, Peugeot, Opel-Vauxhall, etc. German Chancellor Angela Merkel is trying her best to soften the regulations as Germany car companies scramble to reduce fleet CO2 emissions.
Ms. Merkel's "conservative" German government is also concerned about unwelcome foreign influence on EU companies. Her government is particularly suspicious of large foreign state-run investment funds, particularly from Russia and China. As current leader of the EU, Ms. Merkel wants to implement a system to review proposed foreign investments to make sure they aren't potentially damaging to EU (read: German) interests. The system would be a series of guidelines, not an outright ban on foreign investment.
The Brits and Americans view the proposals as "protectionism" while the Germans like to think of it as "economic patriotism". I guess it all depends on how you look at things. After all, when is the last time you heard an American refer to private equity as "locusts"? I wonder what the US would be like if we practiced economic patriotism -- something that disappeared decades ago.
