Continental and Schaeffler merger stalls

Porsche is not the only company whose ambition became too big for its own good ended up being the target of a reverse takeover. Almost overnight, gambled away, and lost its highly prized status as the only independent sports car company in the world by trying to take over Volkswagen; a company many times bigger than Porsche.

Porsche is not the only company that courted such a fate. Earlier, this blog posted a story regarding Schaeffler's attempt to take over Continental, a company 3 times the size of Schaeffler. Continental had just completed a merger with Siemens VDO and had a lot of debts to finance, the credit crunch made things worse and made Continental vulnerable. Schaeffler had quietly purchased Conti's stocks via proxies in the open market.

Like Porsche, Schaeffler's attempt was debt financed. I quote from Automotive News Europe :
Despite buying 90 percent of Conti's stock, Schaeffler could easily lose control of its intended prey and may end up being swallowed by it.

Following the bid battle, Schaeffler holds a 49.9 percent direct stake in Conti. A further 39.36 percent is held by Schaeffler's banks -- Sal Oppenheim and Metzler -- in a sort of warehousing deal to reflect the fact that Schaeffler does not actually have the money to buy all of Conti. Schaeffler has signed an agreement that it will not increase its stake above the current 49.9 percent level prior to August 2012.

This leaves Schaeffler in an awkward spot. It cannot consolidate Conti and the two companies continue to be run as separate units in an uncomfortable stand-off. Conti is not paying a dividend, meaning that Schaeffler can only finance the stake out of its own earnings. Meanwhile, Conti's share price has fallen sharply from the 75 euros Schaeffler paid a year ago to about 25 euros (about $35.50) now.


At the moment, both Continental and Schaeffler continue to operate as separate companies (negating any benefits of combined purchasing power of a merged company) and there is no clear direction on where will the two companies go from here. Today, Continental's CEO Karl-Thomas Neumann was forced out after a bitter board room struggle between Continental and Schaeffler. Neumann will be replaced by Elmar Degenhart, formerly from Schaeffler's automotive business division. More on that here.

The takeover attempt was engineered by Schaeffler's matriach Maria-Elisabeth Schaeffler, and like Wendelin Weideking's case with Porsche, nobody really know what was their motivation behind the move. Both are really brilliant people. The only logical explanation for Weideking is that he realised Porsche can no longer remain independent by just making 80,000 plus sports cars and Cayennes etc etc a year. The current growing environmental legislation and increasing vehicle development cost meant that Porsche will have to partner with a mainstream company if it wants to survive, which due to historical ties will most likely be Volkswagen. But Porsche can't survive based on ad-hoc joint developments with VW on a model-model basis (i.e. VW Touareg-Porsche Cayenne). Thus explains the takeover attempt.

Schaeffler is a predominantly mechanical parts supplier - specialising in bearings and transmission components. But mechanical parts are increasingly becoming a cheap commodity that new competitors from China and India can easily muscle their way in with their low cost products. Plus, cars are becoming increasingly reliant on electronics - powertrain controls, safety, hybrid and electric vehicle control systems, navigation, climate control etc etc. Schaeffler needs to move upmarket to adapt itself to this new trend. Continental is also a leading supplier in hybrid vehicle electronic components. It supplies the battery packaging, cooling and power control modules for the Mercedes S400 Bluehybrid - the world's first lithium ion battery production hybrid car. The current sweeping wave of hybridisation and electrification of automotive powertrain provides automotive part suppliers a once in a lifetime chance to turn the tables around in their relationship with automakers. Taking control of Continental allows Schaeffler to quickly gain access to intellectual properties and manufacturing facilities to penetrate into the electronic vehicle control systems business.

At the moment, suppliers are increasingly being pressured to lower their cost while still meeting increasingly tough engineering specifications. Battery technology and hybrid / electric cars is the disruptive technology here. None of the established car makers have a clear lead here and all of them rely on their parts supplier partners. The unwritten game plan for automotive parts makers is to take the lead in creating a standardised format / technology to be adopted by all. Preferably an off the shelf component package that can be easily adapted to any hybrid / electric vehicle application. Whoever that manages to direct the automotive parts industry in this direction will be able to dictate more favourable terms to their business, rather than continue to be pressured by automakers. And only you can only do that is by exercising sheer might and size. Currently, every car maker is doing their own thing with their own partners. This cannot be viable in the long term. Like any manufactured components - you need volume, and to do volume you need standardisation. Can you image if Energizer and Duracell were to produce two different battery size form factors. Are you going to produce many different types of torchlights for all the different batteries? Some square some round etc etc. Or car tires don't have a standard measurement / form factor? Obviously the current practise cannot work in the long term and a common standard must emerge from this.

Of course, nobody knows the actual reason behind these decisions other than Weideking and Schaeffler themselves. The above are purely this author's speculation.