Sitting ducks?

With the final regulatory hurdle apparently cleared, Spanish builder Actividades de Construccion y Servicios (ACS) is poised to assume control of German rival Hochtief and form the world's largest construction company.

But a lack of political will to intervene in the hostile bid has left many Germans upset with the national framework for takeover regulation.

Now that the Spanish company has increased its stake in Hochtief beyond 30 percent, that framework permits ACS to build a majority stake of 50 percent or more by buying additional shares on the open market. Unlike many other European nations, German law does not require ACS to make a binding offer to all shareholders or disclose its share holdings.

Although ACS maintains it is pursuing its takeover plan in good faith, German employees fear the Spanish firm may start dismantling Hochtief once public assurances about job guarantees and local autonomy expire in 2013.

Heiko Stiepelmann, deputy managing director of the German Construction Industry Federation, says a loss of operational control over Hochtief is a problem for the German economy.

"It's worth something to have a company regulated from Germany," he told Deutsche Welle. "That's important for the entire German economy: machinery construction, planning offices and specialized builders. Hochtief provides general construction services, but it always needs specialized partners, and it finds those partners in Germany."

No bailout needed

Unlike Germany's struggling automaker Opel and troubled department store chain Karstadt, Hochtief is fiscally sound and emerged from the financial crisis intact. That leaves Stiepelmann wondering why the federal government showed no willingness to change takeover regulations to prohibit investors from "low balling and creeping in" on German firms like Hochtief.

"Most other large European nations would not have allowed a takeover in the way it's currently taking place," he said. "For us it has been an issue of the adjustment of Germany's takeover regulations… we're not particularly happy with the way this has been decided."

In October 2010, Germany's opposition Social Democratic Party (SPD) suggested changes which would have required those holding between 30 to 50 percent of shares in a German company to make public any new acquisitions of stakes larger than 2 percent within a 12 month period. They would also be required to make a binding offer to other shareholders.

Similar regulations exist in the United Kingdom, France, Austria and Italy.

"When it comes to takeovers in Germany, German companies are at a disadvantage," Stiepelmann said.

European patchwork

Hochtief did benefit from one peculiarity of German financial law, however. As part of its defense strategy, the construction giant was permitted to issue new shares to grant Qatar's sovereign-wealth fund a 9.1 percent stake in the company.

Many European regulators oppose such capital increases because they dilute the power of existing minority shareholders. They also breach the spirit, but not the letter, of the 2004 European Union takeover directive, which is due to be revised in 2011.

Critics say the existing EU framework offers national governments too many opportunities to opt out of specific regulations.

The result is a patchwork system that allows investors in some nations to secretly build stakes in target companies using financial derivatives – much as Porsche did in its ill-fated pursuit of Volkswagen. Another example is French luxury group LVMH, which used equity swaps to acquire a 20 percent stake in rival company Hermes.

Same struggles elsewhere

Thomas Williams, who covers Germany for the business intelligence service Mergermarket, said national governments are limited in their ability to protect companies from foreign takeovers.

"If you legislate to close a loophole… capital markets will anticipate the move and quickly adapt," Williams told Deutsche Welle. "The legislative process in any country is going to take time and will often therefore be a step behind."

Takeovers by foreign companies can drive a wedge between national governments' political interests and their commitments to free market ideals. He pointed out that British chocolate maker Cadbury was unable to fend off a 2009 takeover bid by US company Kraft Foods despite strong public opposition to the deal.

"Does (the ACS-Hochtief deal) mean that Germany is less able to protect its crown jewel companies than other European countries? Not necessarily," Williams said. "I think it would have been very difficult for the government, as a member of a European Union committed to free markets, to intervene."

Author: Gerhard Schneibel
Editor: Sam Edmonds