Schaeffler’s Continental drift

August 11, 2009

Continental/Schaeffler (photo: Reuters)The power struggle at Continental hardly inspires trust in Schaeffler. The privately-owned ball bearings company wants to boot out Conti’s CEO — effectively tearing up a standstill agreement it signed last year — and install one of its own divisional managers.

Schaeffler should be stopped, for several reasons.

The first is that it flies in the face of an agreement it entered into with Conti’s shareholders to respect the car part maker’s independence. This is wrong. The deal, which prevents Schaeffler taking over Conti until 2012, also bound it “to support the ongoing strategy and business policy of the executive board while maintaining its current market and brand appearance, and not to demand a sale of operations or seek other significant restructuring measures”. Sacking the current CEO, Karl-Thomas Neumann, flouts the spirit if not the word of this.

Second, the move risks destabilising Conti’s business. The company has warned in an internal memo that contracts, customers and employees could be lost if Neumann is pushed out. Given that Conti is labouring under a 10 billion euro ($14.2 billion) debt load, this must be a possibility. And were it to happen it would hurt not only the Schaefflers but all Conti’s creditors.

Third, Schaeffler, which has been at loggerheads with Conti since taking a 49 percent stake last year, wants to install Elmar Degenhart — head of its own autos division — in Neumann’s seat. This represents a major conflict. Degenhart and Schaeffler will have a financial incentive to do deals that transfer value from Conti to Schaeffler. Take for instance an agreement that transferred 1 billion euros of value from Conti to the ball-bearing component maker. Although the value of Schaeffler’s stake in Conti would fall, it would still be 500 million euros better off.

The fact that Schaeffler is willing to publicly flout an agreement and sacrifice its own nominated chairman of Conti’s supervisory board, Rolf Koerfer, only deepens the suspicion about its motives.

The proximate cause of the fight seems to be Neumann’s championing of a capital issue to reduce Conti’s debts. Were the group to raise 1.5 billion euros in fresh equity, this would almost inevitably dilute the cash-strapped Schaeffler.

Conti’s supervisory board meets again on Aug 12. following a mediation period. All Schaeffler needs is a simple majority at that meeting to appoint a new chief executive.

But who can shareholders rely on to stop the Schaefflers? Well, top of the list is former German chancellor Gerhard Schroeder, who was appointed as their ombudsman. Given that Schroeder appears to have been working behind the scenes to broker a compromise deal for Neumann’s exit, shareholders and Conti workers must have their doubts about what to expect.

So it is the banks which lent to Schaeffler and Conti who are ultimately the only group really able to halt the Schaeffler steam roller. They have so far kept an extremely low profile, working behind the scenes to broker a deal which will address the multi-layered problems facing the two companies.

Maria-Elisabeth Schaeffler — who controls the company — was once quoted as saying: “You can’t get along in this world by being nice to everyone.” The banks would do well to take a leaf out of her book.

(Photo: Reuters)

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