While there is rising pressure on large German conglomerates to take similar measures such as the one taken up by General Electric where it announced fragmentation of its business, company executives in Germany need to work in unison with the representative of the labor unions placed on their boards because they have the power to veto such plans.
Therefore, unless the large German conglomerates are able to win over powerful labor leaders, the task of strategy overhauls would be a difficult task.
Therefore, bankers and executives said, that it is more likely that partial listings instead of complete breakups would take place for businesses like Volkswagen’s truck business, Daimler and BMW’s joint mobility division and a few of the business of Continental such as powertrains and sensors.
Half the seats on the supervisory boards of large corporations have German labor representatives who can block any radical strategies. The representatives have the power to veto strategic moves which might lead to increased vulnerability for companies to hostile takeovers or job losses.
For example, labor approval is the critical factor that would decide the fate of Thyssenkrupp’s planned steel joint venture with Tata Steel in Europe.
And because there was agreement between the board and the labor reps about the potential of a merged Franco-German rail company for better competing with Chinese rolling stock manufacturer CRRC in the long run, it was possible for Siemens to list its healthcare business and to merge its rail operations with French rival Alstom.
Typically, specialized businesses are most often seen to be more valuable compared to large conglomerates because specialized businesses do not have the binding of sharing of balance sheet with business giving lower returns when there is boom in the specialized business.
“The advantages from having a diversified conglomerate, for funding purposes for example, are not as pronounced as the valuation discount on conglomerates through complex structures,” said Alexander Mayer, a Goldman Sachs partner in investment banking in Germany.
“Companies are more vulnerable to takeovers or become targets of activist investors if they are burdened with a conglomerate discount,” Mayer said.
However, there were warnings issued by German labor leaders about breaking up conglomerates into smaller parts which can result in some high-tech divisions becoming so small that they can fall easy prey to Chinese rivals acquiring them up or they could fall prey to hostile takeover bids by financial investor – something that had taken place at British engineering group GKN.
“Breakups are a dangerous way forward”, said Juergen Kerner, a management board member of Germany’s biggest trade union IG Metall.
One of the factors that is complicating the scene for breaking up of large German conglomerates is the rising trend of Chinese companies to buy high-tech businesses during a period when there is apparently little that German regulation tools can do to prevent unwanted takeovers.
(Adapted from Reuters.com)